New York State College of Agriculture At Cornell University Ithaca, N. Y. Library Date Due rNlav7 53 i l\pr5' 54NIJ Cornell University Library HB3711.M5 Business cycles. 3 1924 003 462 680 UBRARY AUG 9 1944 DEPT. OF AGRIC. ECON. \^\ /} JM ^^ Cornell University Library The original of this book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924003462680 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Volume 3 BUSINESS CYCLES BY WESLEY CLAIR MITCHELL UNIVERSITY OF CALIFORNIA PRESS BERKELEY SEPTEMBER, 1913 COPYRIGHT 1913, BY WESLEY CLAIR MITCHELL Published Septembek 27, 1913 ^ ( ^) >t- b ^ BUSINESS CYCLES MAY 25 1821 ^^f-^f^i ^7:;^ BUSINESS CYCLES BY WESLEY CLAIR MITCHELL UNIVERSITY OF CALIFORNIA PRESS BERKELEY 1913 MS* COPYRIGHT, 1913, BY WESLEY CLAIR MITCHELL -a\^GQS L. S. M. PREFACE This book offers an analytic description of the complicated processes by which seasons of business prosperity, crisis, depression, and revival come about in the modern world. The materials used consist chiefly of market reports and statistics concerning the business cycles which have run their course since 1890 in the United States, England, Germany, and Prance. I am the sorrier for the bulkiness of the volume because I have written for the man of business as well as for the professional economist. Doubtless a skillful expositor might have presented the same results in fewer pages ; but most of the bulk is due to my conviction that the quickest way to attain reliable results is to take great care in measuring the phenomena exhibited by business cycles. Readers who look over the first chapter will find that many diverse theories about the causes of crises seem plausible when considered in the light of common knowledge. To determine which of these explanations are really valid, it is necessary to find out the regularity with which each alleged stress recurs, the scope which each attains, the elements which enter into each, and the consequences with which each is associated. To make progress toward the solution of these problems requires the collection and analysis of elaborate records of business experience in quantitative form. Men seriously interested in the workings of the money economy will share my regret that the statistical materials are not more complete, rather than complain that too many tables are offered. And if any who lack time or patience for study take up the book, the ."Suggestions to Readers" will show them where to find the gist of the conclusions. One of the chief difficulties in the investigation has been to get quantitative data for the four countries dealt with which can fairly be compared. Official documents and business journals present many tables with such scanty explanations that one cannot make out precisely what the statistics include. I have ventured rather boldly in setting such figures side by side, and have doubtless made some blunders which those \^dth. better opportunities of knowing the work of statistical bureaus may point out. In almost all cases, however, the comparisons are made, not between actual amounts in different countries, but between the relative fluctuations which actual amounts undergo in the course of business cycles. For such comparisons it is indeed desirable, but it is not indispensable, to have statistics of precisely the same scope. Pains have been taken to put the data derived from different countries and different branches of business into comparable form by reduction to common units and by computing relative figures upon a common basis — averages for the decade 1890-99. In order to facilitate comparison still further numbers of not more than three or four digits have been used in most of the tables. Many small discrepancies occur between totals and the items which enter into them, because I have not indulged in the common statistical practice of forcing figures in order to secure formal consistency even at the cost of accuracy. The quarto format was chosen in order that the charts might be printed directly on the page without the use of folding "inserts." All charts showing relative quantities were originally [yii]- drawn to the same scale. But in reproducing the drawings for publication it was found necessary to reduce the size of some much more than of others. Of course the constant relation between the horizontal units of time and the vertical units of relative quantity was not disturbed by this process. Inequalities of outside measurement matter little, because the slope of the curves is the important thing, and the eye notes similarities or differences of slope about equally well in charts of the same and of different sizes. Several friends have assisted me by reading and criticizing parts of the manuscript — Mrs. Warren Gregory, Mr. John Gralaam Brooks, Professor Walter Morris Hart, Professor Jessica B. Peixotto, and Professor Henry Rand Hatfield. The editors of the Journal of Political Economy have courteously permitted the use of certain statistical materials first published in their columns. My thanks are also due to Mr. J. C. Rowell of the University of California Library, to Dr. C C. Williamson of the New York Public Library, and to the authorities of the Royal Statistical Society's Library, London. But, more than all others, my wife has shared in making this book. Wesley Claik Mitchell. 37 West Tenth Street, New York City. [ viii ] ■ SUGGESTIONS TO EBADERS Those who desire to get quickly the gist of the conclusions reached concerning the causes of business cycles are advised to begin with the last chapter. Points which they find obscure in the summary there presented, or points in which they have especial interest, may be looked up in Chapters X-XIII by aid of the table of contents. Economic theorists will find the viewpoint from which the investigation has been made set forth in Chapter II, in the "Framework" of Parts II and III, and in the final section of Chapter XIV Readers concerned with recent business history, maj' find whatever materials the book presents for their purposes by using the table of contents under Chapters III-IX, and XII. Those looking for statistical materials and those interested in statistical methods should consult the table of contents under Part II. Discussions of monetary and banking problems occur not only in Chapters VI and VII. but also in Chapters XI, iii ; XII, ii and v ; XIII, i, 2, D, and XIV, iii, 3. [^] PLAN OF THE BOOK PART I The Problem and Its Setting Chapter I. A Preliminary Eeview of Current Theories concerning Business Cycles. Chapter II. The Economic Organization of Today. Chapter III. The Annals of Business, 1890-1911. PART II Statistical Data Concerning the Business Cycles op 1890-1911 in the United States. England, France, and Germany The Framework of Part II. Chapter IV. The Fluctuations of Prices since 1890. Chapter V. The Volume of Business. Chapter VI. The Currency. Chapter VII. The Condition of the Banks. Chapter VIII. Saving, Investment, Enterprise, and Speculation. Chapter IX. Profits and Bankruptcies. PART III The Rhythm of Business Activity The Framework of Part III. Chapter X. The Cumulation of Prosperity. Chapter XI. How Prosperity Breeds a Crisis. Chapter XII. Crises. Chapter XIII. Business Depression. Chapter XIV. The Wider Aspects of Business Cycles. ;xi] CONTENTS PART I THE PROBLEM AND ITS SETTING PAGE Chapter I. A Preliminary Review op Current Theories Concerning Business Cycles. I. Types of the Early Theories of Crises 3 II. Current Theories of Business Cycles. 1. Two points of agreement 5 2. Beveridge's "competition theory" - 6 3. May's theory of the discrepancy between wages and productivity 7 4. Hobson's theory of over-saving 7 5.' Aftalion's theory of diminishing utilities 8 6. Bouniatian's theory of over-capitalization 9 7. Spiethoff's theory of the ill-balanced production of industrial equipment and complementary goods 10 8. Hull's theory of the changing costs of construction 11 9. Lescure's theory of variations in prospective profits 13 10. Veblen's theory of the discrepancy between prospective profits and current capitalization 14 11. Sombart's theory of the uneven expansion in the production of organic and inorganic goods 16 12. Carver's theory of the dissimilar price fluctuations of producers' and consumers' goods 16 13. Fisher's theory of the lagging adjustment of interest 17 14. Johannsen's theory of "impair savings" 18 III. The Method of Investigation 19 Chapter II. The Economic Organization op Today. I. Money Economy 21 II. The Business Enterprise. 1. Uneven development of business enterprises in various fields 22 2. The interdependence of business enterprises 23 3. Pecuniary versus industrial factors in business prosperity 24 4. Factors affecting pecuniary profits 26 III. The System of Prices. 1. The prices of consumers' commodities 27 2. The prices of producers' goods in relation to the prices of consumers' com- modities , 27 [xii] 3. The prices of producers' goods in relation to antecedent prices 28 4. The prices of business enterprises 29 5. The prices of services to persons 29 6. The interrelations between prices 30 7. The role of prices in economic life 31 IV. The Guidance of Economic Activity. 1. The role played by technical experts 32 2. The role played by enterprisers 32 3. The role played by lenders 34 4. The role played by government 36 5. The alleged " planlessness " of production 37 V. International Differences in Economic Organization. 1. The fundamental similarity of organization 40 2. The relative importance of different industries ■. 40 3. Thrift and enterprise 41 4. Banking systems and monetary habits 42 5. The government's share in directing economic activity 43 Chapter III. The Annals op Business, 1890-1911. I. The Business Cycles of 1873 to 1889. 1. The Crisis of 1873 44 2. The later seventies and early eighties 45 3. Business expansion in the later eighties and the French crisis of 1889 46 II. The Crisis of 1890 and the European Depression of 1891-94. 1. The crisis of 1890 48 2. The depression of 1891-94 in Europe 49 III. The Panic of 1893 and the Depression of 1894^96 in the United States. 1. The business years 1891 and 1892 51 2. Contemporary explanations of the panic of 1893 51 3. The influence of the Sherman silver-purchase act 52 4. The decline of the gold reserve 53 5. Business conditions and the panic 54 6. The events of the panic 56 7. The struggle to maintain the gold reserve after the panic 56 8. Business depression in 1894 58 9. The brief revival of 1895 59 10. The stringency of 1896 59 11. The return of depression 59 IV. Business Prosperity of 1895-99 and the Crisis of 1900 in Europe. 1. England 60 2. Germany • 61 3. France • 62 [ xiii ] V. Business Prosperity of 1897-1902 and the Crisis of 1903-04 in the United States. 1. The prosperous years 1897-99 63 2. The pause of activity in 1900 64 3. The stock-market mania of 1901 and the Northern Pacific "Corner" 65 4. The prosperity of general business in 1901-02 65 5. "The Rich Man's Panic" of 1903-04 67 6. "The American invasion of Europe" 68 VT. Business Depression in Europe, 1901-04. 1. England 70 2. Germany ; 71 3. Prance 72 VII. The Prosperous Times of 1905-06 in Europe and America. 1. England 73 2. Germany 73 3. France 74 4. The United States 74 VIII. The Crisis of 1907. 1. England 75 2. Germany 76 3. France 76 4. The United States 77 IX. The Depression of 1908-09 and the Revival of 1909-11 in England and Germany. 1. England 78 2. Germany 80 X. The Depression of 1908, the Revival of 1909, and the Reaction of 1910-11 in France and the United States. 1. France 81 2. The United States 82 XI. Summary 86 PAET II Statistical Data Concerning the Business Cycles op 1890-1911 in the United States, England, Prance, and Germany The Framework of Part II 91 Chapter IV. The Fluctuations of Prices Since 1890. 1. The Prices of Commodities. 1. The available data and the methods of analysis 93 2. The prices of consumers' goods at retail 94 3. The prices of consumers' goods at wholesale 96 4. The prices of producers' goods 98 5. The prices of manufactured goods and of raw materials 99 6. The prices of organic and inorganic goods 104 7. The dispersion of price fluctuations 109 8. The representative character of index numbers 112 9. The fluctuations of prices in the United States, England, France, and Germany.... 118 [xiv] II. The Prices of Labor — Wage?. 1. The American data 130 2. The prices of labor in American manufacturing industries 132 3. The prices of labor in England 136 III. The Prices of Loans — Interest. 1. The tables of interest rates 140 2. Rates of interest yielded by investments in bonds 156 3. Rates of interest upon short-time loans 160 4. International comparisons 163 IV. The Prices of Shares in Business Enterprises. 2. Tables of the relative prices of American common stocks 172 3. The course of the New York stock market in 1890-1911 189 3. The course of the New York stock market in 1890-1911 189 4. The diversity of fluctuations in the prices of common stocks 191 5. The prices of preferred stocks 194 6. The prices of stocks, bonds, and commodities 201 7. International comparisons : 219 Chapter V. The Volume of Business. I. The Physical and the Pecuniary Volume of Business 223 II. The Movement of the Population 224 IIL The Volume of Goods Produced 230 IV. The Volume of Domestic Trade 242 V. The Volume of Foreign Commerce 252 VI. The Volume of Goods Consumed 264 VII. Unemplojonent 268 VIII. Per Capita Indices of the Volume of Business 271 Chapi'ee VI. The Cuebency. L The Production of Gold 278 II. The Quantity of Gold Currency 279 IIL The Quantity of Silver and of Paper Money 288 IV. The Distribution of the Monetary Stock among the Banks, the Public, and the Treasury 295 V. The Volume of Deposit Currency 300 VI. The Velocity of Circulation 306 Notes : A Revised Estimate of the Amount of Money held by the Banks of the United States in 1890-1911 311 The Volume of Deposit Currency in the United States, 1890-1911 318 Chapter VII. The Condition of the Banks. I. The Clearing-House Banks of New York 323 II. The National Banks 333 III. The National Banks in Reserve Cities and in Rural Districts 356 IV. The Joint-Stock Banks of England and Wales ..-,- 373 V. The Central Banks of England, France, and Germany 377 ['"'J Chapter VIII. Saving, Investment, Bnterpeise, and Speculation. I. Saving ..'.. 387 II. Investment, Enterprise, and Speculation. 1. Savings-bank deposits —- 390 2. Purchases of bonds and of stocks 393 3. Applications for investment loans 398 4. The establishment of joint-stock companies 410 5 The savings and investments made by business enterprises out of current income.— 414 6. Investments in railway construction and in the erection of buildings 418 Chapter IX. Profits and Bankruptcies. I. Profits. 1. American railways 422 2. The national banks 427 3. German corporations 431 II. Bankruptcies. 1. The United States 438 2. England, France, and Germany 444 PART III The Rhythm op Business Activity The Framework of Part III 449 Chapter X. The Cumulation of Prosperity. I. The Beginnings of Revivals in Business Activity 452 II. The Diffusion of Business Activity. 1. The increase in the demand for commodities 453 2. The development of business optimism 455 3. The laggards in business revivals 456 4. The statistical signs of business revivals 456 III. The Rise of Prices. 1. The prices of commodities. A. Why prices rise 457 B. How the rise of prices reacts upon the demand for commodities 459 C. How the rise of prices spreads and cumulates 460 D. Why different groups of commodity prices rise in dissimilar degrees 461 2. The prices of labor , 464 3. The prices of loans 466 IV The Increase of Profits. 1. Why profits increase 468 2. The rise in the prices of stocks 469 V. The Volume of Investments 471 VI. The Business Equilibrium 472 [XVI] Chapter XI. How Prosperity Breeds a Crisis. I. The Increasing Costs of Doing Business. 1. Supplementary costs 475 2. The prime costs of weak enterprises 476 3. The cost of lahor 476 4. The cost of materials 481 5. The cost of bank loans ^ 482 6. The declining economy of business management 483 II. Industrial Equipment and the Investment Market. 1. The consequences of increasing the industrial equipment 483 2. The development of stringency in the investment markets 485 3. The decline of investment borrowing 486 4. The check upon orders for new construction 487 III. The Tension in the Money Market. 1. The demand for short-term loans 489 2. The supply of short-term loans 490 3. The development of stringency 491 4. The inter-relations between prosperity and the quantity of money in circulation.... 492 IV. The Decline of Prospective Profits. 1. The problem of defending profits against the encroachments of costs 494 2. Hindrances to the continued advance of selling prices. A. Public regulation, contracts, and custom ."... 496 B. The increase of capacity for producing goods 497 C. The advance in interest rates 499 D. Under-consumption 499 3. The critical point - 502 V. The Undermining of Business Credit. 1. The relations between credit and profits 503 2. The effect of prosperity upon the volume of credits 505 3. The effect upon outstanding credits of the decline in prospective profits 506 Chapter XII. Crises. I. The Beginning of Liquidation 512 II. A Typical Panic— The United States, 1907. 1. The beginning of the panic of 1907 515 2. The scramble for money 516 3. The demoralization of the markets for loans and investments 522 4. The reaction of monetary stringency upon general business 530 III. A Typical Crisis— England, 1907. 1. The beginning of reaction 538 2. The effect of foreign crises 539 3. The crisis in industry and commerce 543 IV. The Close of Crises - - 548 V. The Prevention of Panics 550 [ xvn] Chapter XIII. Business Depression. I. How Crises Breed Depressions. 1. Abortive revivals of activity - 554 2. The cumulation of depression. A. The volume of business 556 B. The fall of prices - 558 C. Savings and investments 559 D. The currency and the banks 560 II. How Depression Breeds Prosperity. 1. The re-adjustment of prime costs 562 2. The re-adjustment of supplementary costs 564 3. The increase in the physical volume of business 565 4. The end of liquidation 568 Chapter XIV. The Wider Aspects op Business Cycles. I. Summary of the Preceding Theory of Business Cycles. 1. The cumulation of prosperity 571 2. How prosperity breeds a crisis 573 3. Crises 576 4. Depression 577 Note. — The relation of the preceding theory of business cycles to the theories reviewed in Chapter I 579 II. Diversities Among Business Cycles and their Causes. 1. The diversities 581 2. Their causes 582 III. Business Cycles in Economic History. 1. The genesis of business cycles 583 2. Man's mastery over the workings of the money economy 585 3. Proposals for controlling business cycles 586 IV. The Forecasting of Business Conditions. 1. The exceptional opportunities of certain financiers 588 2. The business barometers available to the public 591 3. Suggestions for bettering business barometers. A. New barometers needed 593 B. The improvement of old barometers 594 C. Difficulties in the way 595 V. The "Money Surface of Things" and What Goes on Beneath 596 [ XVIII ] PART I THE PROBLEM AND ITS SETTING CHAPTER I A PRELIMINARY REVIEW OF CURRENT THEORIES CONCERNING BUSINESS CYCLES I. Types op the Early Theories of Crises Serious efforts to frame a theory of business cycles began with the contem- porary discussions of the economic crisis of 1825/ Differences of opinion promptly appeared regarding the cause of this widespread dislocation of trade — differences which multiplied as the crises of later years brought new mater- ials and new men into the discussion. Presently crises became one of the accredited topics of economic theory, and systematic writers began to develop explanations based upon their doctrines of production, distribution, and exchange. Before the end of the nineteenth century there had accumulated a body of observations and speculations sufficient to justify the compilation of histories of the theories of crises.^ Inevitably, the early efforts to a:ccount for the exceedingly complex phe- nomena of crises were crude and superficial. But the problem commanded so much attention that the character of the treatment rapidly improved. Each recurring crisis, indeed, produced a fresh crop of ill-considered explanations; but meanwhile other writers were steadilj^ using and bettering the work of their predecessors. In this process of elaboration, however, the early differ- ences of opinion did not disappear. Instead, they became standardized into several distinct types of theory, each represented in the growing literature by a number of variants. First may be put the view that crises are ' ' abnormal ' ' phenomena, produced by some disturbing event such as the introduction of revolutionary inventions, the development of new means of transportation which alter old trade-routes, wars, the revision of tariffs, fluctuating monetary standards, crop failures, the unexpected bankruptcy of some conspicuous business enterprise, changes in fashion, and the like. Such explanations proceed upon the assumption that 1 E. von Bergmann, Geschichte der nationaldkonomischen Krisentheorien (Stuttgart, 1895). As usual, research has discovered a number of fragmentary discussions by earlier writers. See the opening pages of von Berg- mann 's successive chapters. 2 Von Bergmann 's book, cited in the preceding note, is the most elaborate. The best histories in English and French are E. D. Jones's Economic Crises (New York, 1900), and J. Lescure's Des crises generales et peri- odiques de surproduction (Paris, 1907), pp. 433-522. [3] 4 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA the equilibrium of economic activities lias become so delicate that it may be disturbed by untoward conjunctures of the most dissimilar kinds, and point to the conclusion that each crisis has its own special cause which must be sought among the events of the immediately preceding years.' Next in formal simplicity is the type of theory which ascribes crises to "inflation." An increase in coin, in irredeemable paper money issued by the government, in bank-notes, or in deposit currency produces an advance of prices. The latter stimulates business to great activity, which runs to extremes in reckless investments and feverish speculation, and ends in a crash of credit and widespread bankruptcy. The "over-production" and "under-consumption" theories contend that, owing to the efficiency of modern machinery, the power of society to produce has outstripped its power to consmne. Hence the periodical occurrence of "general gluts" — paradoxical situations in which superabundance causes want. Unable to sell their increasing output of goods at remunerative prices, employers are forced to close their factories and turn away their hands — a remedy which aggravates the disease by reducing yet more the community's power to purchase for consumption. To the classical economists the theory of general over-production was a heresy, which they perseveringly sought to extirpate by demonstrating that the supply of goods of one sort necessarily constitutes demand for goods of other sorts. But maladjusted production they allowed to be possible, and their theories of crises usually sought to show how maladjustment comes about through the sinking of capital in unremunerative investments. Such locking- up of capital was often held to be one result of "the tendency of profits to a minimum. ' ' When this tendency has reduced the current rate of profits to an unaccustomed level, the less sagacious capitalists become dissatisfied and embark in ill-considered schemes. There results the production of goods for which no market can be found, business failures, and the loss of confidence — in short, a crisis which extends over all lines of trade. Another group of economists, among whom Schaffle Avas prominent, accepted ill-adjusted production as the cause of crises ; but accounted for it by the com- plexity of modern economic organization. Not only are manufacturers com- pelled to produce goods months in advance for a market whose changes they cannot forecast, but investors are compelled years in advance to put their funds into enterprises the need of which is uncertain. A close coordination between supply and demand is not possible. The mistakes which are made should be ascribed less to avoidable errors of judgment than to the planlessness of capi- talistic production. 3 Jones gives a good analysis of this type of theories in his second chapter. Eoscher is perhaps the best known representative. MITCHELL: BUSINESS CYCLES 5 But the most vigorous attempt to prove that crises are a chronic disease of capitalism is that made by Rodbertus, Marx, and their followers. The gist of the socialist contention is usually that the laborer receives as wages much less than the real value of his product. Hence the demand for consumers' goods, which must depend largely upon the great mass of wage-earners, fails to keep pace with the increase of the output. Meanwhile, the capitalist-employers are investing their current savings in new productive enterprises, which presently begin to add their quotas to the market supply. This process runs cumula- tively until the time comes when the patent impossibility of selling goods at a profit brings on a crisis. So bald a statement as the preceding falls far short of doing justice to the nineteenth century writers upon crises; but it suffices to indicate the foundations upon which our contemporaries have built their more elaborate explanations. The latter conserve all of permanent value which the earlier economists achieved, and contain in addition certain fresh contributions to the subject. Accordingly, a review of the leading discussions which have been pub- lished since 1900 will afford an adequate introduction to the problem as it stands today. II. CUERENT ThEOEIES OP BUSINESS CyCLES 1. Two Points of Agreement Wide divergences of opinion continue to exist among competent writers upon crises ; but in recent years substantial agreement has been reached upon two points of fundamental importance. Crises are no longer treated as sudden catastrophes which interrupt the ''normal" course of business, as episodes which can be understood without investigation of the intervening years. On the contrary, the crisis is regarded as but the most dramatic and the briefest of the three phases of a business cycle ■ — prosperity, crisis, and depression.' Modern discussions endeavor to show why a crisis is followed by depression, and depression by prosperity, quite as much as to show why prosperity is followed by a crisis. In a word, the theory of crises has grown into the theory of business cycles.' This wider grasp of the problem has discredited the view that crises are due to abnormal conditions which tempt industry and trade to forsake their beaten paths and temporarily befog the judgment of business men and investors. 4 The not infrequent statement that prosperity sometimes merges into depression without the intervention of a crisis means simply that the writers understand by crisis a violent disturbance of business conditions. It is in closer accord with every-day usage to call such occurrences ' ' panics, ' ' and to apply the term ' ' crisis ' ' to the transition from prosperity to depression even when accomplished quietly. On closer inspection, a busi- ness cycle is often found to be complicated by minor changes, such as the interruption of depression by a premature resumption of activity, the occurrence of a pause or even a slight crisis in the midst of pros- perity, and the like. But for the present it is wise to confine attention to the broadest features of the cycle. 5 Compare W. Sombart, "Versuch einer Systematik der Wirtschaftskrisen," ^rcWi) fiir 5o2iahume?isc;iaft, 1904, pp. 1-21. 6 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA or to misguided legislation, unsound business practices, imperfect banking organization, and the like." As business cycles have continued to run their round decade after decade in all nations of highly developed business organ- ization, the idea that each crisis may be accounted for by some special cause has become less tenable. On the contrary, the explanations in favor today ascribe the recurrence of crises after periods of prosperity to some inherent characteristic of economic organization or activity. The complex processes which make up business life are analyzed to discover why they inevitably work out a change from good times to bad and from bad times to good. The influence of special conditions is admitted, of course, but rather as a factor which complicates the process than as the leading cause of crises. 2. Beveridge's "Competition Theory" Among these theories which seek to account not for crises but for the cyclical fluctuations of economic activity, the ''competition theory" tentatively advanced by Beveridge is one of the simplest. In most instances, he begins, production is carried on by several or many establishments, each acting independently, and each seeking to do as large a share of the business as possible. Whenever the demand for their wares increases, each competitor tries to engross a larger portion of the market. ' ' Inevitably, therefore, all the producers together tend to overshoot the demand and to glut the market for a time. This is a result not of wild speculation nor of miscalculation of the total demand ; it must be a normal incident wher- ever competition has a place at all." Such activity among producers consti- tutes the period of prosperity. But sooner or later the glutting of the market becomes apparent, and then the crisis comes, because the goods cannot all be sold at a profit. Prices fall, production is checked, and a period of depression ensues. Gradually, however, the slackened rate of production allows the accum- ulated stocks to be cleared, perhaps below cost price, perhaps by waiting until demand grows up to supply. When this excess of demand over supply has once again become patent business recovers. Depression yields to prosperity, competitors again vie with each other to increase their shares in the output, after a few years the market is glutted again, and a new crisis comes, to be followed once more by depression. Thus business cycles are due in the last resort to "the simple and well nigh universal fact of industrial competition."' The first type of theories mentioned in the preceding section. ' W. H. Beveridge, Unemployment, ed. 3 (London, 1912), chapter iv. MITCHELL: BUSINESS CYCLES 7 3. May's Theory of the Discrepancy between Wages and Productivity Like Beveridge, May conceives crises to result immediately from the glut- ting of markets for industrial products. But May offers a quite different analysis of the cause of gluts. The continually growing productivity of industry makes necessary a corresponding growth of the market, if disaster is to be avoided. But to enable producers to sell their growing output promptly prices must be reduced and wages must be raised in proportion as the supply of goods increases. For it is only by combining an increase in the money income of the mass of the population with a decrease in the cost of commodities that a country's home markets can be kept expanding with the progress of industrial methods. Periods of prosperity attended by rising prices necessarily violate this condition of business hygiene and inevitably end by glutting mar- kets. Then come crises, which restore the body politic to health by forcing down prices to the point where consumers can purchase the supplies which are offered. The germ of the trouble, then, is the tendency of prices to rise during periods of increasing productivity. Accordingly, May urges as remedy a legal limitation of the rate of profits, in order that producers may be forced to reduce prices as they increase output." 4. Hobson's Theory of Over-saving A third explanation of how markets come to be glutted periodically is offered by Hobson's theory of over-saving. Hobson holds that at any given time "there is an exact proportion of the current income which, in accordance with existing arts of production and existing foresight, is required to set up new capital so as to make provision for the maximum consumption throughout the near future. " Now, if in a period of prosperity the rate of consumption should rise pari passu with the rate of production, there is no inherent reason why the prosperity might not continue indefinitely. But in modern societies, a considerable portion of the wealth produced belongs to a small class. In active times their incomes rise more rapidly than their consumption and the surplus income is perforce saved. There results for the community as a whole a slight deficiency of spending and a corresponding excess of saving. The wealthy class seeks to invest its new savings in productive enterprises — thereby increas- ing the supply of goods and also increasing the incomes from which further savings will be made. This process runs cumulatively during the years of prosperity until finally the markets become congested with goods which cannot be sold at a profit. Then prices fall, liquidation ensues, capital is written down, and the incomes of the wealthy class are so reduced that savings fall below the proper proportion to spending. During this period of depression the glut of 8 R. E. May, Das Grundgesetz der Wirtsehaftslcrisen (Berlin, 1902). 8 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA goods weighing upon the market is gradually worked off, and the prospect of profitable investment slowly returns. Saving rises again to the right pro- portion to spending and good times prevail for a season. But after a while the chronic impulse towards over-saving becomes fully operative once more, and soon or late begets another congestion of the markets and this congestion begets another depression. Proximately, then, the cause of alternating pros- perity and depression is the tendency toAvard over-saving; ultimately it is the existence of the surplus incomes which lead to over-saving.'' 5. Aftalion's Theory of Diminishing Utilities The possibility of a general over-production of goods has often been denied on the ground that human desire is insatiable. Recently Aftalion has sought to show that this objection may be set aside by the laws of marginal utility. He ascribes the fall of prices which characterizes a crisis to the effect of general over-production in diminishing the social use-values of the whole mass of com- modities offered for sale. While admitting that there can be no general fall of values in exchange, he contends that there can be such a fall of values in use. Human wants are not all met; but the wants for the concrete goods in the market are gratified to such a degree that their marginal utilities decline. There follows a general fall of prices — often to points below the costs of pro- duction. Similarly, the rise of prices in prosperity results from a rise of marginal utilities caused by a relative scarcity of goods in proportion to the community's needs — that is, from under-production. But whence come these alternations of over-production and under-produc- tion? Aftalion sees them as consequences of the "round about" method of production characteristic of capitalism. When there is a promising market for consumers' goods we set about building new factories and ordering new machines. A considerable time is required to provide such new equipment. During this interval prices rise because goods are scarce, and prosperity reigns. But when at last the new factories are completed and the new machines installed, they begin to turn out consumers' goods in great masses. Presently the market is overstocked, values in use decline, prices fall, and a crisis comes. After the crisis, depression rules for a season because the excessive equipment provided during the period of prosperity is itself durable, and goes on flooding the market with its products. Therefore values in use and prices continue to fall, despite the redundant supply of money. Under such discouraging cir- cumstances, producers do not increase the size of their plants; they do not even replace all the equipment which is worn out. Consequently, productive capacity slowly diminishes. Since wants do not shrink, but rather expand, »I have followed Mr. Hobson's latest exposition, The Industrial System (London, 1909), chapters iii and xviii. MITCHELL: BUSINESS CYCLES 9 the day finally dawns when the current supply of consumers' goods and the stocks of materials are found to be inadequate. Then the social value of goods of all kinds rises, prices advance, prosperity returns, and the whole cycle begins anew." 6. Bouniatian's Theory of Over-capitalization Bouniatian's theory of over-capitalization is much like Hobson's theory of over-saving. Any one among many causes may so affect supply and demand as to cause the prices of some important group of commodities to rise. This advance tends to propagate itself by raising the prices of all related commod- ities. At the same time it concentrates purchasing power in the hands of those who own the goods which have advanced in price. This concentration of pur- chasing power enhances the accumulation of capital; for (1) the desire for increased consumption does not expand so quickly as income has risen, and (2) the spirit of enterprise is excited by increased profits received. The larger supply of capital leads to a greater demand for the means of production, and raises their price — now concentrating purchasing power in the hands of those who own or produce the means of production. This new concentration enhances once more the accumulation of capital. Thus the process, initiated by a casual rise of prices in any part of the industrial field, soon reaches the industries which turn out industrial equipment and runs cumulatively for a time. But ultimately the process works its own reversal. For the centralization of purchasing power in the hands of a small class is at the expense of the purchasing power of the masses. Absolutely consumption grows, but its growth is slower than that of the supply of goods turned out by the increasing industrial equipment. In the last resort the prices of these means of pro- duction are dependent on the prices of the consumers' goods which they help directly or indirectly to produce. In the end, therefore, the failure of con- sumption to expand at the same pace as the accumulation of capital and the means of production in which the capital is invested inevitably causes con- sumers' and producers' goods to fall in price. Then the process is reversed. Purchasing power, instead of being concen- trated in the hands of the owners of goods, is dispersed. The fall of prices propagates itself and goes on cumulatively as the rise had done. Much of the industrial equipment stands idle and deteriorates, not only from lack of repair but also from the invention of improved processes and machinery. Thus an approximate equality between the community's power of consumption and its equipment for production is brought about. Meanwhile the large supply of idle capital in the form of loanable funds drives down the rate of interest. Ultimately the time comes when the supply of goods is no longer superabund- ! 10 A. Aftalion, Essai d'une theorie des crises gHerales et periodiques (Paris, 1909). See also his replies to criticisms by Gide and Lescure in Bevue d'economie politique, April, 1910. 10 MEMOIRS OF TPIE UNIVERSITY OP CALIFORNIA ant, and fresh ventures may be undertaken at a low rate of interest with good hope of success. Then in some line prices receive a fillip, and the whole process begins once more with concentration of purchasing power, increased savings and lively demand for goods. Thus prosperity and depression are two unlike results of the same cause — over-capitalization. That is, the ceaseless striving of productive energy to keep profitably employed causes production to expand more rapidly than consumption, and infallibly produces a maladjustment with alternating periods , of expansion and contraction. The roots of the difficulty lie deep in the capi- talistic organization of society, which separates the individual's activit}' in production from his activity in consumption, and so favors inequality in the distribution of wealth — a condition which is both cause and consequence of over-capitalization." 7. Spietlioff's Theory of the Ill-balanced Production of Ivdustrial Equipment and Complementary Goods While Hobson ascribes crises to over-saving and Bouniatian to over- capitalization, Spiethoff ascribes them primarily to ill-balanced production of industrial equipment and complementary goods. A revival of prosperity leads first to the full utilization of the existing industrial equipment, and then to a rush to produce new equipment. The latter movement results from a heavy investment of capital by men who hope to share in the high profits which pros- perity promises. After a time the new equipment begins turning out goods which seek a market — partly goods to satisfy personal wants, partly goods to be used in producing other goods. Over-production inevitably results after a time in those industries which make industrial equipment. For the demand for this type of goods is capable of being substantially satisfied by a few years of activity. That is, the community finds itself provided with enough indus- trial equipment to produce all the goods which can find a profitable market and then the demand for further machinery, etc., drops off, leaving short of orders the foundries, machine shops, etc., which have been rapidly extended. Meantime the capital which had accumulated in superabundant volume during the preceding depression has been absorbed, and further business expansion is checked by the inadequacy of current savings to supply the needs of business borrowei's. This slackening demand for new industrial equipment, combined with the scantiness of loan-capital, brings the period of prosperity to a close. Unemployment among workmen and losses among capitalists, beginning in the industries which make industrial equipment, cause a decline in consumers' demand and react upon all industries which make goods for personal needs. 11 M. Bouniatian, Studien sur Theorie und GescMchte der Wirtschaftslcrisen (Municli, 1908) vol. I. MITCHELL: BUSINESS CYCLES 11 Then an over-production of consumers' goods becomes apparent and the circle of the unemployed and of the losing capitalists widens. So matters go from bad to worse in a vicious circle and the depression deepens for a time. But, like prosperity, depression works its own end. The weakest producers are forced out of business, new needs develop, the fall of prices, wages, and interest cuts down the cost of production, and the capital value of plants is reduced by foreclosure sales, agreements with bondholders and the like. At last the time comes when production at a profit seems possible again. For a while business conditions are relatively stable; but presently activity becomes more marked, demand for industrial equipment grows animated, and the cycle of prosperity, crisis, and depression is repeated. Over-production of goods for producing other goods and the increasing scarcity of loan-capital, then, are the results of prosperity which cause crises and depressions. But, Spiethoff asks, exactly what do these phrases mean? Over-production means that there are more machines, etc., than can be sold at a profitable price, for the reason that possible purchasers cannot get enough capital to pay for and to operate them. This scarcity of capital means proxi- mately that the loan funds in the investment markets have been depleted by the heavy borrowings • of prosperous years. But this lack of capital in the shape of money for lending conceals the real difficulty — a lack of the capital goods which the would-be borrowers need for carrying on the process of extend- ing their enterprises. To increase the supply of money would work no real cure; for the money transferred from lender to borrower is useless unless it can be converted by purchase into those goods which are required for oper- ating the industrial equipment that threatens to fall idle. These goods are primarily labor and the goods which laborers consume. The root of the evil is, therefore, ill-proportioned production — over-production of industrial equip- ment and such durable consumption goods as dwellings, and a concomitant under-production of the goods necessary to employ the equipment." 8. Hull's Theory of the Changing Costs of Construction An American business man, George H. Hull, has recently drawn from his experience of practical affairs conclusions which resemble those drawn by Professor Spiethoff from his theoretical analysis of economic records. High prices of construction, runs his thesis, is the hitherto "unknown cause of the mysterious depressions" from which the industrial nations suffer. In demonstrating this thesis, Hull contends that agriculture, commerce, and finance fluctuate within relatively narrow limits. Agriculture provides the necessities of life, commerce distributes them, and finance adjusts the bills. 12 Spiethoff has published his analysis in a series of articles in Schmoller's Jahrbuch fiir Gesetsgehung, 1902, pp. 721-759; 1903, pp. 679-708; 1909, pp. 445-467 927-951, 1417-1437. 12 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA The volume of all this business is fairly constant, because the demand for necessities is incapable of sudden expansion or contraction. Industry, on the contrary, may expand or contract indefinitely — especially that part of industry devoted to construction work. For the sources of "booms" and depressions, therefore, we must look to the enterprises which build and equip houses, stores, factories, railways, docks, and the like. Of the huge total of construction, which Hull believes to make over three- quarters of all industrial operations, at least two-thirds, even in the busiest of years, consists of repairs, replacements, and such extensions as are required by the growth of population. This portion of construction is necessary and must be executed every year. But the remaining portion is "optional con- struction," and is undertaken or not according as investors see a liberal or a meager profit in providing new equipment. Now, when the costs of construction fall low enough to arouse "the bargain- counter instinct," many of "the far-seeing ones who hold the purse-strings of the country" let heavy contracts, and their example is followed by the less shrewd. The addition of the resulting new business to the regular volume of "necessity construction" plus the provision of ordinary consumers' goods creates a "boom." But, after a year or two, contractors discover that their order books call for more work than they can get labor and materials to finish on contract time. When this oversold condition of the contracting trades is realized, the prices of labor and of raw materials rise rapidly. The estimated cost of construction on new contracts then becomes excessive. Shrewd investors therefore begin to defer the execution of their plans for extending permanent equipment, and the letting of fresh contracts declines apace. As they grad- ually complete work on their old contracts, all the enterprises making iron, steel, lumber, cement, brick, stone, etc., then face a serious shrinkage of busi- ness. Just as the execution of the large contracts for ' ' optional construction, ' ' let in the low-price period, brought on prosperity, so the smallness of such contracts, let in the high-price period, now brings on depression. Then the prices of construction fall until they arouse "the bargain-counter instinct" of investors once more, and the cycle begins afresh. While Hull grants that panics are often caused by strictly financial dis- orders, he holds that all industrial depressions are caused by high prices of construction, and foreshadowed by high prices of iron. Consequently he believes that depressions could be prevented from occurring if the government would collect and publish monthly "all pertinent information in relation to the existing volume of construction under contract for future months, and all pertinent information in relation to the capacity of the country to produce construction materials to meet the demand thus indicated. ' "'^ 13 George H. Hull, Industrial Depressions (New York, 1911), p. 218. MITCHELL: BUSINESS CYCLES 13 9. Lescure's Theory of Variations in Prospective Pro-fits Lescure agrees with Spiethoff that business cycles arise from irregular activity in producing producers' goods, and that the latter in turn is connected with the alternating ebb and flow of the capital invested in industry and trade. But he explains the periodical expansion and contraction of these investments in a fashion different from Spiethoff. To him changes in the prospective rate of profits are the important factor. By profits he means the margin between selling prices and cost of production. A period of prosperity inevitably comes to an end because cost ultimately creeps up on selling prices so far as to reduce the margin of profits and hence to discourage further investments. This increase in cost is due to high prices for raw material, high rates of interest, high wages, and heavy expenses in establishing new enterprises and extending old ones. Selling prices cannot be indefinitely raised to preserve the margin of profit from these encroachments b}' costs, because there comes a time when the ever-increasing supplies offered on the market have satisfied the more pressing wants, and people will not buy the yet larger quantities of goods at yet higher prices. When the prospective profits of fresh enterprises have been thus rendered doubtful, investors hesitate to make business loans on the grand scale which is necessary to sustain the movement of expansion. Instead they begin to prefer the lesser risks of gov- ernment bonds and similar conservative securities. The inability of business enterprises to borrow freely checks the execution of their plans for extensions, and hence reduces the demand for producers' goods. Then the enterprises turning out these goods find themselves in difficulties, and the weakest are presently forced to the wall. One disaster leads to another, owing to the close interrelationship which exists between different establishments and different trades. A wave of depression sweeps over the business world, and for a time the prospects of profits become darker and darker. But depression, like prosperity, has its own limits. Demand cannot shrink indefinitely, for consumers must be fed, clothed, and housed. All the elements in cost decline — raw materials, M^ages, interest, expenses of getting established. Further, the depression stimulates efforts to improve methods of production. Thus ultimately costs are readjusted on a lower level, the prospective margin of profit first ceases to shrink, and later begins to expand. The spirit of busi- ness enterprise is once more aroused, investors turn back to business loans, and prosperity returns for its brief day." 14 Jean Lescure, Des crises genirales et periodiques de surprodmction (Paris, 1907), pp. 496-522. 14 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA 10. Veblen's Theory of the Discrepancy between Prospective Profits and Current Capitalization The chief merit of Lescure's discussion is its realistic air, its effort to look at business cycles from the standpoint of the man of business. In this effort, however, the French economist has been anticipated by an American. Veblen ■begins his discussion of "the theory of modern welfare" by pointing out that prosperity, crisis, and depression ' ' are primarily phenomena of business ; they are, in their origin and primary incidence, phenomena of price disturbance, either of decline or of advance They affect industry [only] because industry is managed on a business footing, in terms of price and for the sake of profits. ' ' A period of prosperity is ushered in by a rise of prices, caused, for example, by an increased supply of gold, or by heavy government purchases. This rise affects first some one industry or line of industries, which responds with a burst of activity and increased investments by business men anxious to exploit the profitable field. Partly by actual increase of demand, partly by lively anticipation of future increases, aggressive business enterprise extends its ventures and pushes up prices in remoter branches of trade. Thus the rise of prices is carried over into one branch of business after another. Now the growing demand and enhanced prices increase the prospective profits of the business enterprises in each trade as they reach it. Larger pros- pective profits lead to higher market capitalization of the business enterprises, and, of course, higher market capitalization means an increased value of the properties as collateral security. Thus the way is paved for the marked extension of credit on which the active trade is largely dependent. This sequence of growing demand, rising prices, increasing expectations of profit, swelling capitalization of business enterprises, and expanding credit runs on cumulatively so long as its basis continues — an anticipated increase in demand or selling prices greater than the anticipated increase in costs. But eventually the process undermines its own basis. For costs rise with the increasing cost of labor, and with the gradual extension of the advance in prices to all the commodities which business enterprises buy. In the end these costs gain so much upon prospective selling prices as to cut down the anticipated margin of profit. Then the enhanced market capitalization of the business enterprises begins to seem excessive. Consequently, the collateral security for loans shrinks in the estimation of the business community and ceases to be regarded as an adequate guarantee of the credits which have been granted. The confident tone of business expectations which characterized the period of prosperity yields to nervousness. To bring on a general crisis it needs but that some considerable creditor should conclude that the present earning capacity of his debtor no longer warrants the capitalization upon which MITCHELL: BUSINESS CYCLES 15 Ms collateral is appraised. When this happens liquidation begins, extending from one industry to another and converting prosperity into depression. Yeblen differs from most •writers in holding that, once begun, business depression tends to maintain and perpetuate itself, instead of tending to produce a resumption of activity. Business men commonly ascribe their troubles to over-production ; but what they mean is that not enough of their products can be sold for satisfactory prices to warrant the running of mills at full capacity, or near enough capacity to yield a fair profit. "Fair" profit means to the business men a satisfactory return on what they regard as the capital value of their enterprises. Reductions in this capital value are assented to with extreme reluctance, and usually lag behind the decline which has taken place in earning capacity. But such reductions are gradually forced during depression by the bankruptcy of the weakest enterprises and their reorganization with reduced fixed charges. This process of reorganization turns the weakest com- petitors into the most dangerous. Yet more important is the unceasing advance in technical perfection which characterizes modern machine industry, and which enables the new plants which are built from time to time to start with a marked initial advantage in equipment over their partially antiquated pre- decessors. The difficulty of earning a fair profit without submitting to a reduction of capitalization is made chronic by these conditions. "Hence depression is normal to the industrial situation under the consummate regime of the machine, so long as competition is imchecked and no deus ex macMna interposes." The only abiding refuge from such chronic depression is thor- oughgoing coalition in all those lines of business in which coalition is feasible. It is,' to be sure, only in the last generation that the march of technical progress has become steady and rapid enough to establish this condition of chronic depression ; but it promises to become more and more pronounced in the future. Periods of prosperity are taking on the character of episodes, initiated by some extraordinary increase in the demand for goods, and running out presently into the normal state of depression through the sequence of events which has been recited. To Veblen, then, the important factor in determining the character of a business period is the discrepancy between current capitalization and antici- pated earning capacity. When the latter rises, business has a season of pros- perity, during which capitalization expands rapidly. But rising costs always undermine the basis for anticipating high profits and then capitalization is left higher than anticipated profits warrant. The latter situation characterizes depression." 15 T. B. Veblen, Theory of Business Enterprise (New York, 1904), ch. vii. Professor E. E. A. Seligman has worked out a theory of crises which resembles Veblen 's in the run of ideas and in phraseology. See Ms introduction to The Currency Frohlem and the Present Financial Situation. A series of addresses delivered at Columbia University, 1907-08. 16 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA 11. Sombart's Theory of the Uneven Expansion in the Production of Organic and Inorganic Goods Sombart, like many of the i^ecent German writers, finds ill-proportioned production the chief cause of crises ; but he thinks it inaccurate to say that the over-production is in industrial equipment. For during the German "boom" which collapsed in 1900-01, over-production was quite as marked in industries making equipment for electric lighting systems, telephone plants, street rail- ways, dwellings, bicycles, etc., as in industries making machines. The real lack of proportion he sees in the unlike degree of expansion in industries using organic and inorganic materials. The inorganic industries, typified by steel, can expand to an enormous extent within a brief period without being seriously hampered by scarcity of raw^ materials. The organic industries, typified by cotton-spinning, on the contrary, are always in precarious dependence upon the year's harvests. In the organic industries, one may say, the condition of business is determined by the harvests; in the inorganic industries the con- dition of business determines the production of raw materials. The modern crisis, then, following upon a period of prosperity, is substantially the result of the different rhythm of production in the organic and inorganic realms. The organic industries dependent upon harvests cannot keep pace with the inorganic when the latter are being rapidly extended by heavy investments of capital." 12. Carver's Theory of the Dissimilar Price Fluctuations of Producers' and Consumers' Goods Carver has suggested a way of accounting for business cycles by applying the laws of value which govern producers' goods. He points out that a com- paratively small change in a factory's selling prices will cause a much greater change in its profits, if volume of output and expenses remain the same. Since the value of the factory as a going concern is the capitalized value of its prospective profits, a large increase of profits will cause a large increase of the factory's value, provided the high profits are expected to continue long. Hence the law that "the value of producers' goods tends to fluctuate more violently than the value of consumers' goods." It follows that: "A slight rise in the price of consumers' goods will so increase the value of the producers' goods which enter into their production as to lead to larger investments in producers' goods. The resulting larger market for producers' goods again stimulates the production of such goods, and withdraws productive energy from the creation of consumers' goods. This for the time tends 16 W. Sombart, ' ' Die Storungen im deutschen Wirtschaf tsleben, ' ' Schriften des Vereins fur Sooialpolitik vol. 113, pp. 130-133. MITCHELL: BUSINESS CYCLES 17 to raise the price of consumers' goods still higher, and this again to stimulate still further the creation of producers' goods. There is no check to this tendency until the new stock of producers' goods begin to pour upon the market an increased flow of consumers ' goods. This tends to produce a fall in their value, which in turn produces a still greater fall in the value of producers ' goods, and so the process goes. ' ' Thus, once more, prosperity breeds crisis and depression ; but this time the reason is found in the dissimilar fluctuations which the laws of value establish for the goods which people use and the equipment with which they are made." 13. Fisher's Theory of the Lagging Adjustment of Interest Another interesting suggestion comes from Irving Fisher. By statistics he has shown that when for any reason prices begin to rise, interest rates advance, but not fast enough to offset the decline in the purchasing power of the principal caused by the rise of prices. During such periods, accordingly, borrowers on the whole get the better of lenders and make high profits. Since the borrowers consist largely of active business men, precisely the class of greatest foresight, they grasp the situation more quickly than lenders. As a result of their desire to profit by their opportunity, loans are rapidly extended. This extension is effected largely by the lending of bank credits, that is, by the increasing of deposit currency. The greater volume of the currency com- bines with more rapid circulation of money and checks to increase prices again, and so to start the whole process anew on a higher level. "There is thus set up a vicious circle, which will continue just as long as the rate of interest fails to make a proper adjustment to put on the brakes and prevent over-borrowing." "But the rise in interest, though belated, is progressive, and, as soon as it overtakes the rate of rise in prices, the whole situation is changed." Bor- rowers can no longer hope to make great profits, and the demand for loans ceases to expand. Further, the higher rate of interest reduces the price of many of the securities used as collateral for loans. Business men "who have counted on renewing their loans at the former rates and for the former amounts are unable to do so. It follows that some of them are destined to fail." There follow suspicions regarding the solvency of the banks, runs for cash, forced curtailment of loans, and exceedingly high rates of interest — in short, the phenomena of crisis. The contraction of loans is accompanied by a reduction of deposit currency and a slower circulation both of money and of cheeks. Hence prices decline. Again the rate of interest follows ; but just as it was slow to rise so now it is slow to fall. Then the business men who borrow find that the sluggish adjust- 17 T. N. Carver "A Suggestion for a Theory of Industrial Depressions," Quarterly Journal of Economics, May, 1903,' pp. 497-500. 18 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA ment of interest reduces their profits. Therefore loans, and the deposits based on loans, contract again. But the shrinking volume of deposit currency causes a further fall of prices, and once more interest lags behind and renews the process. Thus the phase of depressions runs cumulatively until at last the progressive reduction of interest has overtaken the fall of prices. At this point business men find their profits rising to the normal level. Borrowing becomes freer, the volume of deposit currency swells, prices start upward, and the cycle begins afresh." 14. Johannsen's Theory of "Impair Savings" The Neglected Point in Connection with Crises^'' which N. Johannsen has developed is really a point in connection with depressions. Saving, he reminds us, always threatens to produce "a minus of demand." In periods of pros- perity this minus is cancelled by a plus, because the savings are promptly invested in new construction. But, when a crisis comes, the volume of con- struction work shrinks. The business men engaged in all branches of "con- tracting" begin to run behind, and their employees are thrown out of work. The industries which supply brick, lumber, structural steel, rails, cement, etc., promptly suffer a decline in the demand for their products and so also do the industries which cater to the personal needs of the men dependent upon the stagnant industries. What, then, becomes of the ciurrent savings which, if times were good, would be invested in construction? Johannsen answers that they are spent largely in lending upon or in buying property which the men in the stagnant industries are compelled to mortgage or to sell. Now, when savings are invested in this fashion, they do not give rise to any plus of demand for fresh products to cancel the minus of demand which the act of saving creates. In other words, the savings made in times of depression are largely "impair savings." They increase the wealth of the savers, but diminish the wealth of the community. For the act of saving, when unaccompanied by investments which create demand for goods currently produced, disturbs the equilibrium of production and consumption and throws the whole business system out of gear. ". . . . if people could be compelled to expend for luxuries such part of their surplus income as could not find investment [of the demand-producing kind], the 18 Irving Fisher, The Purchasing Power of Money (New York, 1911), chapter iv, and chapter xi, §§ 15 16 17. Compare the same writer's summary statement of his theory in Moody's Magazine, February 1909' pp! 110-114, and H. G. Brown's paper "Typical Commercial Crises versus A Money Panic," Yale Bevie'w Au'eust' 1910. ' ^ ' 19 New York, 1908. MITCHELL: BUSINESS CYCLES 19 depression would at once be b«'^u|fi^(i^^^^Kl There would not then be an excess of working forces, sjpce ttiey would be\bsorbed in the production of luxuries, so far as not em(Dloyf|AVii^ie3§2Jonsl):uctions, or for purposes of replacement.'"" III. The MeThuu uFInvestigation Beveridge ascribes crises to industrial competition. May to the dispropor- tion between the increase in wages and in productivity, Hobson to over-saving, Aftalion to the diminishing marginal utility of an increasing supply of com- modities, Bouniatian to over-capitalization, SpiethofE to over-production of industrial equipment and under-production of complementary goods, Hull to high costs of construction, Lescure to declining prospects of profits, Yeblen to a discrepancy between anticipated profits and current capitalization, Sombart to the unlike rhythm of production in the organic and inorganic realms, Carver to the dissimilar price fluctuations of producers' and consumers' goods, Fisher to the slowness with which interest rates are adjusted to changes in the price level. One seeking to understand the recurrent ebb and flow of economic activity characteristic of the present day finds these numerous explanations both sug- gestive and perplexing. All are plausible, but which is valid? None neces- sarily excludes all the others, but which is the most important? Each may account for certain phenomena ; does any one account for all the phenomena ? Or can these rival explanations be combined in such a fashion as to make a consistent theory which is wholly adequate? There is slight hope of getting answers to these questions by a logical process of proving and criticizing the theories. For whatever merits of ingenuity and consistency they may possess, these theories have slight value except as they give keener insight into the phenomena of business cycles. It is by study of the facts which they purport to interpret that the theories must be tested. 20 P. 82. jSfoTE. In order to bring out the salient points which difEerentiate the several theories reviewed above, I have been obliged to omit much effective detail and all corroborating evidence. In particular most writers show how the operation of the factors upon which they lay stress is reinforced and quickened by speculation. Two contributions to this important aspect of the subject deserve especial mention — Petrazycki's book on speculation and joint-stock companies, and Edward D. Jones's chapter upon the psychology of crises. L. von Petrazycki, Aktienwesen und Spekulation, Berlin, 1906; E. D. Jones, Economic Crises (New York, 1900), ch. ix. I have omitted Pohle's interesting attempt to base a theory of crises upon the steady growth of popu- lation on the one hand, and the unsteady growth of investment on the other hand, because he has recently shifted his emphasis. In 1902 he held that in order to have proper equipment ready for the regular number of new recruits who are ever joining the industrial army, it is necessary to produce machines, raw material, etc.. in larger quantities than the force of old soldiers can use. But the irregularity with which savings are invested prevents this desideratum from being realized every year. In 1910 he agrees substantially with Spiethoff, holding that the chief cause of crises is the inequality in the formation of fixed and circulating capital adding simply that the economic and social consequences of crises are aggravated by the regularity with which population increases even in times of depression. Ludwig Pohle, Bevblherungs'bewegung, Kapitalhil- dung, und periodische WirtsehaftsTcrisen (Gottingen, 1902); " Konjunkturschwankungen und Konjunkturbericht- erstattung," Zeitschrift filr Socialtoissenschaft, Jan., 1910. Neither have I thought it necessary to include the superficial form of the under- consumption theory elaborated by Pierre Vialles in La consommation et les crises Sconomiques (Paris, 1903). Finally, Mr. H. S. Jevons's ingenious attempt to revivify his father's "sun- spot theory" scarcely affords a convincing explanation of the business cycles with which this book is chiefly concerned. ("Trade Muctuations and Solar Activity," Contemporary Beview, August, 1909.) 20 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA But the perspective of the invesigation would be distorted if we set out to test each theory in turn by collecting evidence to confirm or to refute it. For the point of interest is not the validity of any writer's views, but clear com- prehension of the facts. To observe, analyze, and systematize the phenomena of prosperity, crisis, and depression is the chief task. And there is better prospect of rendering service if we attack this task directly, than if we take the roimd about way of considering the phenomena with reference to the theories. This plan of attacking the facts directly by no means precludes free use of the results achieved by others. On the contrary, their conclusions suggest certain facts to be looked for, certain analyses to be made, certain arrange- ments to be tried. Indeed, the whole investigation would be crude and super- ficial if we did not seek help from all quarters. But the help wanted is help in making a fresh examination into the facts. It is not feasible to make a study of all the crises listed in the monographs. Not only is the field too extensive to cover thoroughly, but the recorded infor- mation is also too vague, too much confined to the dramatic events of the crises, and too scanty concerning the intervening phases of depression and prosperity. Whatever chance there may be of bettering the work already done lies in securing data more full and more precise than the data heretofore employed. The minute examination of a few business cycles therefore promises better results than a general survey of many. Hence attention will be concentrated upon those cycles concerning which the fullest and most exact knowledge is available — the cycles of the last two decades. By including England, Germany, and France, as well as the United States, a sufficient number of cases can be had to warrant generalizations. The materials most important for such an investigation are the current reports of business periodicals and the statistical records of business activities. Most stress must be laid upon the latter ; for the problems to be dealt with are largely problems of the relative importance of different factors, or of the general trend of diverse fluctuations. Quantitative analysis of the phenomena is needed quite as much as qualitative analysis. Since in his efforts to make accurate measurements the economic investigator cannot devise experiments, he must do the best he can with the cruder gauges afforded by statistics. At best, the study of statistical tables is a tedious task. In the present case the task is also long, because there are so many phases of economic activity to be looked into. But the figures may possess some measure of interest and meaning from the outset, if they appear as details of a larger system. Accord- ingly, the statistical chapters are prefaced by a sketch of the modern form of economic organization and of the rhythmical alternations of expansion and contraction which have run their course in the, world of business since 1890. CHAPTER II THE ECONOMIC ORGANIZATION OP TODAY I. Money Economy Money economy is one of the ancient institutions which after a checkered history has attained its fullest development in our own day under the influence of machine production and railway transportation. The essential feature of this institution is not the use of money as a medium of exchange ; but the fact that economic activity takes the form of making and spending money incomes. Instead of producing the goods their families require, men "make money," and with their money incomes buy for their own use goods made by unknown hands. The exceptions to this rule presented by the domestic labors of house- wives, by the raising of vegetables in kitchen gardens, by agricultural leases for shares in the crops, etc., are the last survivals of an earlier economic order in which villagers relied chiefly upon goods produced by their own efforts, and themselves consumed most of what they made. The economic comfort or misery of a modern family, accordingly, depends not upon its efficiency in making useful goods and its skill in husbanding sup- plies, but upon its ability to command an adequate money income and upon its pecuniary thrift. Even in years when crops are short and mills are idle, the family with money need not go cold or hungry. But the family without money leads a wretched life even in years of abundance. To the single family, then, prosperity and depression appear not as problems of the adequacy of the goods produced, but as problems of the adequacy of money income. To the nation the making of money is important in a fashion quite different. Comfort and misery do not depend upon the aggregate of money incomes received by its citizens; they do depend upon the abundance of useful goods. Efficiency in producing useful goods is important to an individual chiefly because it enhances his ability to make money ; money-making is important to a nation chiefly because it enhances the efficiency of production. Natural resources, mechanical equipment, and industrial skill are factors of funda- mental importance under any form of economic organization. But where money economy dominates, natural resources are not developed, mechanical equipment is not provided, industrial skill is not exercised, unless conditions [21] 22 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA are such as to promise a money profit to those who direct production. The elaborate cooperative process by which a nation's myriad workers provide for the meeting of each other's needs is thus brought into precarious dependence upon factors which have but a remote connection with the material conditions of well-being — factors which determine the prospects of making money. II. The Business Enterpetse For purposes of making money men have gradually developed the modern business enterprise — an organization which seeks to realize pecuniary profits upon an investment of capital, by a series of contracts for the purchase and sale of goods in terms of money.' These goods usually belong to one of three classes : commodities ; services, such as labor and transportation ; or rights, such as bank credits, securities, and insurance. 1. Uneven Development of Business Enterprise in Various Fields Business enterprises of the full-fledged type have come to occupy almost the whole field in finance, wholesale trade, railway and marine transportation. They dominate mining, lumbering and manufacturing. In retail trade they play an important role, and in agriculture they have secured a foothold — for example, in sugar, coffee, and rubber plantations, in market gardens, nurseries, dairies, and the like. One may even regard the independent craftsman in his repair shop, the small retailer, and the farmer as conducting business enter- prises; for all these classes are learning to apply business methods, and to think of themselves as making a profit rather than as earning a livelihood. The professions also are being invaded by the spirit of business enterprise. Many newspapers seem to be managed with an eye single to profit; not a few legal, dental, and medical offices rest under a like suspicion. But, despite this wide extension of business aims and methods, there still remain broad differ- ences of degree between the enterprises typical of the several fields of effort. In size, in complexity of organization, in dependence on the money market, in singleness of business aim, the typical farm, small retail store, handicraft shop, and professional (jffice are not equal to the typical corporate enterprises of wholesale trade, transportation, manufacturing, lumbering, mining, and finance. The highly organized enterprises of the latter fields constitute the world of business par excellence. In the study of business cycles this uneven development of business organ- ization in different fields is highly important. For it is within the circles of full-fledged business enterprise that the alternations of prosperity and depres- sion appear most clearly, and produce their most striking effects. Practically 1 Compare W. Sombart, Der moderne Kapitalismus, vol. I, p. 195. MITCHELL: BUSINESS CYCLES 23 all of the writers whose theories of crises have been reviewed agree tacitly or explicitly upon this point. They deal primarily with what goes on in the centers of commerce, industry, and finance. Branches of production and trade which are not organized in elaborate business enterprises are much less susceptible both to the stimulus of prosperity and the inhibition of de pression. In country districts, for example, the pace of activity is subject to seasonal but not to cyclical changes such as occur in factory towns. The farmers are never thrown out of work, except by bad weather, and they are never over- rushed except by seed-time and harvest. In other words, the scope and the intensity of prosperity and depression appear to depend upon the extent and the perfection of business organization. The condition of the inner world of business, indeed, affects powerfully, and is powerfully affected by, what goes on among the outside masses of producers and distributors ; but the inner world always remains the focus of interest. 2. The Interdependence of Business Enterprises Not less important for the study of business cycles is the thoroughgoing interdependence of business enterprises. For the accountant's purpose each enterprise may be treated as a separate unit; but for the economist's purpose all enterprises are so bound to each other by industrial, commercial, and finan- cial ties that none can prosper and none can suffer without affecting others. As a plant concerned with the handling of commodities, the typical enter- prise is one cog in a great machine. Our industries are carried on by sets of nominally independent plants which pass on goods to each other in serial succession. For example, one series embraces wheat-growers, grain-carrying railways, elevators, flour mills, wholesale dealers in provisions, bakeries, and retail distributing agencies. Each set of members in such a series is depend- ent upon the preceding set for its chief supplies and upon the succeeding set for its chief vent. The wheat, the flour, and the loaves flow through the successive sets of enterprises in a ceaseless river, though the volume of the flow is not steady. Further, no industrial series is self-sufficing, even as a whole. Each set of enterprises in our example, from the farms to the retail agencies, is industrially dependent on other industrial series which equip it with buildings, machines, fuel, office supplies, etc. A peculiar degree of mutual dependence exists between the whole mass of industries on the one hand, and the railways on the other hand. Coal mining and the steel trade also touch practically every industrial establishment in one way or another. So far has the process of industrial differentiation and integration been carried that "the whole concert of industrial operations is to be taken as a. machine process, made up of interlocking detailed processes, rather than as a multiplicity of mechanical appliances each doing its particular work in severalty,'" 2 Veblen, Theory of Business Enterprise, p. 7. 24 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Since the continuous flow of goods through the successive sets of enterprises which form interlocking series, and the transfers of goods between enterprises belonging to different industries, are maintained by contracts of purchase and sale, there is no need to enlarge upon the commercial aspect of the inter- relations. Each enterprise is affected by the fortunes of its customers, its competitors, and the purveyors of its supplies. Financial interdependence is also in part but another aspect of the indus- trial and commercial bonds. Complicated relationships of debtor and creditor arise from the purchase and sale of goods upon credit, and make the disaster of one enterprise a menace to many. On this financial side the banks bear a relation to all other enterprises like that which the railways bear on tlie indus- trial side ; for all enterprises buy bank credit much as they buy transportation. As a serious congestion of traffic applies the brake to industrial operations, so the inability of banks to lend applies the brake to business dealings. But there is a less obvious type of financial relationship which is rapidly assuming importance. The corporate form of organization makes easy the acquisition of a common ownership in enterprises nominally independent of each other. The same capitalist or coterie of capitalists often owns a large or even a con- trolling interest in companies doing different kinds of business, or the same kind in different places. Thus the selling agent may acquire an interest in the factory whose output he handles; the manufacturer may manage his own retail stores or check competition by buying stock in a rival company, or secure his own raw materials by taking over a mine ; the great capitalist may invest in steel and real estate, in railways and banks, in newspapers and hotels. Thus also we have our "chain" shops, "chain" banks, "chain" newspapers, "chain" theatres, "chain" lumber-yards, and the like. Often the alliance is made closer yet by one corporation buying stock in rival or tributary companies. The scale which such relations have assumed is shown by the Interstate Commerce Commission's report upon the intercorporate relationships of American rail- ways. On June 30, 1906, the par value of railway stocks outstanding was 8,884 million dollars, of which the railways themselves held 4,115 millions. In addition, they held 323 millions of stock in other than railway enterprises.^ 3. Pecuniary versus Industrial Factors in Business Prosperity A business enterprise may participate directly or indirectly in the work of providing the nation with useful goods, or it may not. For there are divers ways of making money which contribute nothing toward the nation's welfare, and divers ways which are positively detrimental to future welfare. But, for the understanding of prosperity and depression, it is more important to observe that even the enterprises which are most indubitably making useful 3 Intercorporate BelationsUps of Bailways in the United States as of June SO, 1906. Special Eeport no 1 dp 9 and 48. f ■ j pp- MITCHELL: BUSINESS CYCLES 25 goods do SO only so far as the operation is expected to serve the primary busi- ness end of making profits. Any other attitude, indeed, is impracticable under the system of money economy. Only government and philanthropy can afford to make public welfare their first consideration. For the man who allowed his himianitarian interests to control his business policy would soon be forced out of business. From the business standpoint the useful goods produced or helpful services rendered are merely by-products of the process of earning dividends. It follows that a theory of modern prosperity must deal primarily with business conditions — with the pecuniary aspect of economic activity. The practice has long prevailed among economists of neglecting this aspect on the ground that money is merely a symbol, the use of which makes no difference, save one of convenience, so long as the monetary system is not out of order. The economists have looked beneath "the money surface of things" to the labor and goods, or the sacrifices and utilities, which they assumed to be the matters of real concern.* When applied to the theory of crises, this practice has diverted attention from the difficulties of business to the difficulties of industry, as if the latter were the fundamental source of economic ills. Thus "over-production" has sometimes been represented as if it were a chronic dis- order of the factory system as such, which periodically infects the business world and causes an epidemic of bankruptcies. Such a view confuses the investigation of crises because it obscures the relations between industry, commerce, and business. The industrial process of providing and transporting goods, the commercial process of collecting and redistributing them, and the business process of making money are measurably distinct, although they run side by side and are largely concerned with the same commodities. For the well-being of the conmiunity, efficient industry and commerce are vastly more important than successful money-making. A busi- ness panic which did not interrupt the making and distributing of wares desired by the community would be no great disaster. But the whip-hand among these three processes belongs none the less to business, since the very men who as manufacturers and merchants provide for the common welfare base their operations on the prospect of money profits. In practice, industry and com- merce are thoroughly subordinated to business. To be sure, business prospects are constantly infiuenced by changes in industry and commerce. A new invention may have important economic con- sequences ; but not unless it reduces costs, alters selling prices, or in some other way affects the pecuniary calculations of business men. Likewise a change of commercial centers or methods may stimulate or depress business in a given district. Such technical changes, indeed, are among the important factors which business men take into consideration in laying plans. In so far forth they become important factors for the student of crises. It is not the disturb- 4 Compare Wesley C. Mitchell, "The Rationality of Economic Activity," Journal of Political Economy, March, 1910, pp. 205-215. 26 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA ances which they produce directly in the production and distribution of goods, however, which gives them weight as causes of prosperity or depression, but the indirect influence which they exercise upon business. In fine, business cycles get their economic interest from the changes which they produce in the material well-being of the community. This well-being depends upon the production and distribution of useful goods. But the indus- trial and commercial processes by which goods are furnished are conducted by business men in quest of profits. Thus the changes which affect the com- munity's well-being come, not from the processes which directly minister to it, but from the process of making money. So thoroughly is this the case that changes in the technique of industry and commerce affect the community pri- marily by stimulating or retarding business activity and then working back to alter the volume of goods provided for social consumption. Accordingly, the conclusion holds that an investigation into the ebb and flow of contemporary economic activity must concern itself primarily with the phenomena of business traffic — that is, of money-making.^ 4. Factors Affecting Pecuniary Profits Business prosperity, in its turn, depends upon the factors which control present and prospective profits, together with present and prospective ability to meet financial obligations. Profits are made by connected series of pur- chases and sales — whether in commerce or manufacture, farming or mining. Accordingly the margins between the prices at which goods can be bought and sold are the fundamental condition of business prosperity. Closely connected with, and in large measure dependent upon, price-margins is the other great factor — the volume of transactions effected. Just as the ever recurring changes within the system of prices affect busi- ness prosperity and through it national welfare, so do changes in national welfare and business prosperity react upon prices. A period of business expansion causes an interminable series of readjustments in the prices of various goods. These readjustments in their turn alter the pecuniary prospects of the business enterprises which buy or sell the commodities affected, and thereby start new changes in business prosperity. With the latter changes the process begins anew. Prices once more undergo an uneven readjustment, pros- pects of profit become brighter or darker, business prosperity waxes or wanes, prices feel the reflex influence of the new business situation, — and so on with- out end. 5 Practically all the recent theories rest tacitly upon this basis. Veblen is explicit upon the point: Theory of Business Enterprise, pp. 177-182. MITCHELL: BUSINESS CYCLES 27 III. The System op Prices The prices ruling at any given time for the infinite variety of commodities, services, and rights which are being bought and sold constitute a system. That is, these prices are so related to each other as to make a regular and connected whole. 1. The Prices of Consum.ers' Commodities The prices which retail merchants charge for consumers' commodities afford the best starting-point for a survey of this system. These prices are loosely connected with each other; for an advance in the price of any com- modity usually creates an increased demand for other commodities which can be bought as substitutes in certain if not all of its uses, and thus creates business conditions which favor an advance in the prices of these substitutes. But retail prices are more closely related to the prices for the same goods which shop-keepers pay to wholesale merchants, and the latter to manufac- turers. Of course, this series of prices for consumers' commodities often has more or less than three members, because of the intervention of more than one wholesale or jobbing house or of an importer in the regular traffic, or because of direct selling by manufacturers to retail merchants or even to consumers. There is wide diversity also in the margins between the successive prices in the series. These margins are usually wider in retail than in wholesale trade ; wider on goods limited in sale, perishable, requiring a large assortment for selection, subject to changes in fashion or in season, than on durable staples; wider when the manufacturer sells directly to the consumer than when whole- sale and retail merchants intervene; wider when a monopolist can fix prices in his own favor than under conditions of keen competition, etc. But these diversities are themselves measurably regular, so that the margins between the successive prices in the series for each kind of commodities forms a tolerable business basis for making profits out of the process of supplying the com- munity with the goods it habitually uses. 2. The Prices of Producers' Goods in Relation to the Prices of Consumers' Commodities The business men engaged in squeezing money profits out of these price- margins are seldom able to keep the whole difference between selling and buying prices. From retailers back to manufacturers they require various commod- ities, services, and rights for the efficient conduct of their operations. For such producers' goods they have to pay out prices which eat into the profit- 28 MEMOIRS OP THE UNIVERSITY OP CALIPORNIA margins on the consumers' goods in which they deal. The most important classes of these producers' goods are commodities such as raw materials and current supplies, buildings with proper machinery or other equipment, manual and mental labor, loans, leases, transportation, insurance, and advertising. To merchants, the prices paid for all these producers' goods are important factors in fixing the margins between the buying and selling prices of the con- sumers ' goods in which they deal. But, save in the case of transportation and certain kinds of labor, it is difficult to connect directly the prices which figure as costs with the margins upon which particular commodities change hands. For the cost prices of the other producers' goods are usually paid for the pecuniary advantage of the enterprise as a whole, and the accruing benefits extend to many transactions and often cover a long time. The like is true of manufacturers, with this modification, that they often regard the margins between the prices of their chief raw materials and their leading products much as merchants regard the margins between the bujdng and selling prices of their staple wares. That is, manufacturers often think of the difference between these particular prices as the margin on which they deal, and from which the costs of their other producers' goods must be deducted in figuring net profits. 3. The Prices of Producers' Goods in Relation to Antecedent Prices With the exception of labor, producers' goods are provided, like consumers' goods, chiefly by business enterprises operating on the basis of margins between buying and selling prices. Hence the price for any given producers' good is related not only to the prices of the consumers' goods in the manufacture or distribution of which it is used, but also to the prices of the various other producers' goods employed in its own manufacture and distribution. Thus the prices of producers' goods do not form the ends of the series of price relationships, but the beginnings of new series of relationships which run back- ward with countless ramifications and never reach definite stopping points. Even the prices of raw materials in the hands of the ultimate producers are related intimately to the prices of the labor, current supplies, machinery, buildings, land, loans, leases, etc., which the farmers, miners, lumbermen, etc., employ. Concerning the prices of such producers' goods as consist of material com- modities no more need be said. And most of the less tangible services — loans, transportation, insurance — require but a word. They are the subjects of an organized business traffic in which price margins are computed on the same general principles as prevail in the buying and selling of commodities. There- fore, the prices charged by the bank, the railway, and the insurance company MITCHELL: BUSINESS CYCLES 29 are systematically related both to the prices which these enterprises must pay for their own producers' goods and to the prices of the wares dealt in by the enterprises which borrow money, ship goods, and carry insurance. The price of labor may seem to bring the series to a definite stop at least at one point. For, in most cases, the laborer or his union deals directly with the employer or his association, and the laborer does not have a business atti- tude toward the production of his own energy. But the price which the laborer can command is indubitably connected with the prices of the consmners' goods which established habit has made into a standard of living. At this point, therefore, analysis of the interrelations between prices brings us not to a full stop, but back to our starting-point, — the prices of consumers' commodities. 4. The Prices of Business Enterprises Besides the prices of consumers' commodities, of raw materials, and of other producers' goods, we must take account of the prices of business enter- prises themselves. Occasionally established business enterprises are sold out- right as running concerns. Promoters are also constantly offering new busi- ness schemes, or reorganizations of old enterprises for sale. But the most important transactions of this class are stock-exchange dealings in the shares of joint-stock companies. That the prices of whole business enterprises or of shares in them are intimately related to the prices which have been discussed is clear ; for these prices depend primarily upon present and prospective profits, and profits depend primarily upon price-margins and the volume of business transacted. 5. The Prices of Services to Persons There remains one other division of the system of prices — a division which has much in common with the prices of consumers' goods on the one hand and with the prices of labor as a business adjunct on the other hand. It consists of the prices of. the heterogeneous services rendered to persons as such— not to business enterprises. Here belong the prices of domestic service, medical attendance, much instruction, many forms of amusement, etc. The furnishing of such services presents a certain contrast to the business traffic in consumers' goods, materials, machinery, loans, transportation, etc. For systematic organ- ization hag not been developed to so high a point, business motives do not have such unrestricted scope, and the wares are not standardized in equal measure. 30 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Moreover, the prices wMcli people are willing to pay for such services are based on personal needs and personal income, rather than on closely calculated chances of profit. The prices of these services therefore form the most loosely organized and irregular division of the system of prices/ / 6. The Interrelations hettveen Prices The value of this classification of prices is that it assists in seeing the relations which bind all prices together and make of them a system. The close relations between the prices of consumers' commodities, materials, business adjuncts of all kinds, and of business enterprises are sufficiently clear, and enough has been said about the looser bonds which unite the prices of services to persons with the larger field of business traffic. But several other lines of relationship should be indicated more definitely. (1) On the side of demand almost every producers' or consumers' good has its possible substitutes in certain or in all uses. Through the continual shifting of demand, changes in the price of one commodity are often communicated to the prices of its substitutes, from the latter to the prices of their substitutes, and so on. An initial change, however, usually becomes smaller as it spreads out in these widening circles. (2) Similarly, on the side of supply, almost every good has genetic rela- tionships with other goods, made of the same materials, or supplied by the same set of enterprises. Along these lines also price-changes may spread over a wide field. Particularly important because particularly wide are the genetic relationships based upon the use of the same producers' goods in many lines of trade. Floating capital most of all, in somewhat less degree transportation and certain general forms of labor, current supplies, machinery and plant, not to mention the less important insurance and advertising, enter into the cost of 8 A tabular survey may assist in getting a general view of the system of prices: Jr'riees of consumers' commodities charged by: Eetail dealers Wholesale dealers Manufacturers Prices of producers' goods: Kaw materials Current supplies Machinery Buildings, etc. Leases Labor Bank loans Investment loans Transportation Insurance Advertising Prices of business enterprises. Prices of services to persons. Behind the prices of each group entered in this classification stands an equally complex array of antecedent prices, and between the several groups exist interrelations too intricate to be set forth in tabular form. MITCHELL: BUSINESS CYCLES 31 most commodities. Accordingly, a changed price established for one of these common producers' goods in any important use may extend to a great diversity of other uses, and produce further price disturbances without assignable limits. (3) Closely connected with this genetic relationship through common pro- ducers' goods is the relationship through business competition, both actual and potential. Insofar as effective competition exists, a state of price-margins which makes any one trade decidedly more or less profitable than other trades in the same market area cannot long maintain itself. For sooner or later the infliix or efflux of capital so changes the supply of the commodities concerned as to restore a balance on the basis of cost prices. (4) Present prices are affected by prices of the recent past and the antici- pated prices of the near future. Indeed, present prices are largely determined by past bargains, which established time contracts. Thus the price system has no definable limits in time. No analysis can get back to the ultimate term in the endless series of bargains which helped to make the prices of the present. (5) Nor has the system of prices any logical beginning or end. At what- ever point analysis may start to follow the interlocking links, to that point will analysis come again if it proceeds far enough. The above analysis, for example, began with the prices of consumers' goods at retail. These prices are paid out of personal incomes. But these incomes are themselves aggregates of prices received for labor, for the use of loan funds, or for the use of rented property ; or they are aggregates of the net price-margins which yield profits. Thus the system of prices is an endless chain. 7. The Role of Prices in Economic Life Prices, then, form a system — a highly complex system of many parts con- nected with each other in diverse ways, a system infinitely flexible in detail yet stable in the essential balance of its interrelations, a system like a living organism in its ability to -recover from the serious disorders into which it periodically falls. The most significant fact about the system of prices, however, is the function it performs in the economic life of nations. It serves as a social mechanism for carrying on the process of providing goods. For prices are the means which make possible the elaborate exchanges, and the consequent specialization, which characterize the modern world. They are the source from which family income is derived, and the means by which goods are obtained for family con- sumption; for both income and cost of living— the two jaws of the vice in which the modiern family is squeezed— are aggregates of prices. Prices also render possible the rational direction of economic activity by accounting, for accounting is based upon the principle of representing all the heterogeneous 32 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA commodities, services, and rights with which a business enterprise is concerned in terms of money price. Most important of all, the margins between different prices within the system hold out that hope of pecuniary profit, which is the motive power that drives our business world. IV. The Guidance of Economic Activity 1. The Role Played h-y Technical Experts The making and distributing of goods by the elaborate modern methods requires highly skilled direction. On the technical side the work is planned by and executed under the supervision of civil, mechanical, mining, and elec- trical engineers, designers, industrial chemists, "efl&ciency experts," etc. These are the men who know how to extract raw materials, refine and manufacture them, devise and operate machinery, organize working forces, — in short, the men who know how to secure the physical efficiency of economic effort. By applying the results and the methods of science to the every day work of the world, they have led the rapid advance in the technique of production of which we feel so proud. 2. The Role Played by Enterprisers' But in no country in the world are these technical experts allowed free scope in directing the work of providing material goods. Higher authority is assigned by the money economy to another class of experts, business men who are skilled not in making goods, but in making money. As an employee of the business man, the engineer must subordinate his interest in mechanical efficiency to his superior's interest in profitable investment. The chief role in directing what use shall be made of the country's natural resources, machinery, and labor is therefore played by its enterprisers. But who and what are these enterprisers ? The classical economists assumed that there stood at the head of the typical business enterprise a capitalist- employer, who provided a large part of the capital invested, assumed the pecuniary risk, performed the "work of superintendence," and pocketed the profits. Many enterprisers of this versatile type remain today ; but the extra- ordinary growth in size and influence of the joint-stock company has given greater prominence to another form of business management. The large corporation, dominant in the business of today, is owned by a miscellaneous and shifting body of stockholders. The funds required for fixed investment are usually provided in some measure by these owners, but in larger • 9 Among the various aliases under which the old "capitalist-employer" and his successors pass today, "enterpriser" seems the least objectionable. It is an old English word, recently brought back into use at almost the same time by P. A. Fetter, Principles of Economics (New York, 1904), and by H. Stanley Jevons, Essays on Economics (London, 1905). MITCHELL: BUSINESS CYCLES 33 part by bondholders, who may or may not own shares as well as bonds. The chief pecuniary risks are borne by the shareholders, but ordinarily under pro- visions which limit their liability to the sums which they have put into their shares. The work of management is largely dissociated from ownership and risk. The stockholders delegate the supervision of the corporation's affairs to a committee — the directors — and the directors turn over the task of admin- istration to a set of general officers. The latter are commonly paid fixed salaries, though they may receive in addition a percentage of the profits, or hold stock in their own right. In such an organization it is difficult to find anyone who corresponds closely to the capitalist-employer. Certainly the typical stockholder, who takes no part in managing the corporation beyond sending in his proxies to be voted at the annual meeting, does not fill the bill. ISTeither does the typical director, who confines such attention as he may give the corporation's affairs to pass- ing on questions of general policy, selecting officers, criticizing or approving their reports, and the like. Finally, the general officers, dependent on the directors, remunerated largely if not wholly by salaries, and practicing among themselves an elaborate division of labor, have no such discretion and carry no such risk as the capitalist-employer. The latter, in fine, has been replaced by a "management," which includes several active directors and high officials, and often certain financial advisers, legal counsel, and large stockholders who are neither directors nor officials. It is this group which decides what shall be done with the corporation's property. In other cases, however, a single enterpriser dominates the corporation, and wields full authority. The stockholders elect his candidates to office, the directors defer to his judgment, the officials act as his agents. His position may be firmly entrenched by outright ownership of a majority of the voting shares, or may rest upon personal influence over the owners of voting shares sufficient to carry elections. In these "one-man" corporations the theoretical division of authority and function becomes a legal fiction. Practically, the dominating head of affairs, who may not be an officer or even a director, cor- responds to the old capitalist-employer, except for the fact that he furnishes a far smaller proportion of the capital, carries a far smaller proportion of the pecuniary risk, and performs a far smaller proportion of the detailed labor of superintendence. These limitations do not restrict, but on the contrary enhance his power, because they mean that the individual who "owns the control," or dominates those who own it, can determine the use of a mass of property and labor vastly greater than his own means would permit. Thus, while the corporate form of organization has made a theoretical division of the leadership of business enterprises among several parties at interest, it has also made possible in practice a centralization of power. The great captains of finance and industry wield an authority swollen by the capital 34 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA which their prestige attracts from thousands of investors, and often augmented still further by working alliances among themselves. Among the enterprisers of the whole country, this small coterie exercises an influence out of proportion not only to their numbers but also to their wealth. The men at the head of smaller enterprises, while legally free to do as they will with their own, find their field of initiative limited by the operations of these magnates. Another result of the rise of large corporations controlled by one or by a few individuals is that the latter have an opportunity to make money for them- selves at the expense of the enterprise itself, or at the expense of the other parties at interest. By giving lucrative contracts to construction or repair companies in which they are interested, by utilizing their advance information of the corporation's affairs for speculation in the prices of its shares, by rigging its accounts for the same purpose, by making loans or granting secret rebates to other enterprises in which the}^ are interested, and by other shifts, it is often possible for an inner ring to make profits out of wrecking the corporation or defrauding the outside holders of stock and bonds. Of course such temptations are resisted in the great majority of cases, but scandals of this kind occur with sufficient frequency to invalidate the easy assumption that every business enterprise is managed to make money for the whole body of its owners. Within the class of enterprisers there has gradually been differentiated a special set, which plays an exceptionally active role in guiding economic activity — promoters. The promoter's special province is to find and bring to the atten- tion of investors new opportunities for making money: new natural resoTirces to be exploited, new processes to be developed, new products to be manufac- tured, new organizations of existing business enterprises to be arranged, etc. But the promoter is seldom more than an explorer who points out the way for fresh advances of the army of industry. When an enterprise of his imagi- nation has been organized and begun operations, the promoter does not often retain the leadership for long. As permanent officers men of more cautious temper and more systematic habits commonly take command. 3. The Role Played hy Lenders The enterprisers, indeed, do not have unlimited discretion in deciding what use shall be made of the available resources, equipment, and labor. In matters of importance their decisions are subject to review by a higher court. For most business projects require the use of funds borrowed from banks, large capitalists, or from the investing public, and this fact gives the lenders an effective veto power over proposals which do not meet their approbation. Whenever an enterpriser applies to an individual capitalist to take an interest in some project, to a bank to discount his notes, or to the investing public to buy bonds, he must satisfy the lenders of his ability to keep up the MITCHELL: BUSINESS CYCLES 35 interest and to repay the principal. Even when the applicant can provide collateral security for the loan, and obviously when he cannot, the lender's decision depends largely upon his own judgment regarding the business pros- pects of the intended venture. To aid their officers in forming intelligent decisions, banks are coming to require applicants for loans to make on stand- ard forms systematic statements of their financial standing and projects. In addition, the banks and the houses which grant mercantile credits subscribe to commercial agencies and maintain credit departments of their own for the purpose of collecting and classifying information about the business standing and prospects of their customers. Similarly, corporations which offer bonds or stocks for sale find it advisable to publish advertisements and circulars setting forth their financial condition, the purposes for which money is being raised, and the anticipated profitableness of the extensions in view. Affidavits from certified public accountants, legal counsel, and consulting engineers are often appended to lend these statements greater force. The review of the projects of enterprisers by lenders, then, is no perfunctory affair. Nor is its practical influence upon the guidance of economic activity negligible.. There are always being launched more schemes than can be financed with the available funds. In rejecting some and accepting others of these schemes, the men of money are taking a very influential though not a very conspicuous part in determining how labor shall be employed, what products shall be made, and what localities built up. Not all lenders, however, are able to make intelligent decisions. The great mass of small investors and not a few of the large lack the experience or the ability to discriminate wisely between profitable and unprofitable schemes. Many such folk put their money into savings banks, rely upon the advice of friends who are better equipped, consult with their bankers, take counsel from the financial press, or follow what they suppose to be the lead of some con- spicuous figure in high finance. Not being able to obtain from impartial sources or personal examination the data necessary for forming an independent judg- ment, they cannot work out their problems along strictly rational lines. Hence they are peculiarly subject to the influence of feeling in matters where feeling is a dangerous guide. The alternating waves of overconfidence and unreas- oning timidity which sweep over the investment market are among the most characteristic phenomena of business cycles. Even those who are looked to for advice are not wholly immune from the contagion of emotional aberration. It follows that the guidance of economic activity by the investing class is not strictly comparable with the intelligent review of plans by competent experts. A more vigorous and more intelligent leadership is exercised by the larger capitalists. They excel the investing public not only in means of securing information and in business sagacity, but also in ability to control conditions. The greatest lenders become perforce much more than lenders. Over the 36 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA enterprises in which they embark large sums they must keep watchful eyes, They support the prices of their securities on the stock market, seek to maintain profitable connections with customers and financial institutions, keep informed concerning the business of competitors, arrange consolidations, plan dividend disbursements, and the like — in short, care for all the varied financial interests of the enterprises in which their fortunes and their prestige are at stake. On the highest levels of business success, indeed, the functions of the investor and the enterpriser merge into each other. The great capitalist becomes a great promoter. He not only vetoes schemes, but forms them and sees that they are carried out. 4. The Role Played Tyy Government A fundamental difference of principle sets off the role played by govern- ment in guiding economic activity from that played by business enterprises. While business enterprises aim at making money, government aims at securing public welfare. Notoriously, this broad difference of principle is sadly blurred in practice. Even in the most democratic countries, public welfare is not always the ruling passion of the men elected to office. Besides, public welfare remains so vague a concept as to leave wide room for differences of opinion about the relative value of rival policies proposed for its promotion. Moreover, among the citizens of a money economy the habit of applying pecuniary tests and accepting pecuniary standards gives a strong commercial flavor to their very statesman- ship. Finally, government is forced to pursue its social ends largely by busi- ness methods. It must count the cost even when it cannot count the gains of what it does in dollars, and by some shift it must raise a money revenue to defray its money outgo. But, after all the necessary qualifications have been made, it still holds true that in dealing with economic problems government keeps closer to fundamental issues than is feasible for business men. Grovern- ment can consider what needs it is important to satisfy, while business men must consider what market demand it is profitable to supply or profitable to create. Were this difference of aim the sole difference between the public and private guiding of economic activity, society would probably be organized on the basis of state socialism instead of on the basis of money economy. But there is this further difference, that government is far less efficient in pursuing its aim of social welfare than business enterprise in pursuing its aim of making money. The scope actually accorded to government in managing industry has been affected no less by apprehension of this shortcoming than by appreciation of government's function as the guardian of common interests. MITCHELL: BUSINESS CYCLES 37 The few services which are almost everywhere performed by govermnent are services in which management for profit is deemed quite incompatible with public welfare. Schools run for profit would not teach the children of the very poor ; sanitary bureaus run for profit could not force their services upon com- munities which need attention, etc. The longer list of services which in some places are assumed by government and in others left to business enterprise fall mainly into four classes : undertakings like water supply, street cars, and rail- ways which are most economically managed as monopolies and therefore open to the suspicion of practicing extortion ; undertakings like the management of forests in which the community is interested in conserving sources of supply over a longer period than competing business enterprises think it profitable to regard; undertakings like the improvements of rivers and harbors, the recla- mation of waste lands, and the building of canals in which the prospects of profit are not sufficiently bright to attract the requisite amount of private capital ; and undertakings like the salt, tobacco, mining, and lottery monopolies of Europe which are frankly exploited by government for the sake of raising revenue. Over a far wider field, government affects the guidance of economic activity by trying to prevent the pursuit of private profit from clashing with public welfare. Factories are required to adopt expensive safeguards for the benefit of their employees or patrons; they are forbidden to employ the cheap labor of yomig children, to keep women at work more than eight hours a day, etc. Most of these regulations are negative in character; but government also attempts to direct business enterprise into undertakings which are claimed to be socially advantageous though unprofitable without assistance from the state. Protective tariffs upon imports, bounties upon the production of sugar, and ship subsidies are examples in point. Still more in general, the whole plan of raising public revenues and deciding public expenditures, the methods of providing for the public defense and main- taining domestic order, the monetary system and even the form of political institutions, in short, everything government is and does, influences the direction of economic activity. For the money economy is so flexible a form of organ- ization that the prospects of profits and therefore the direction of economic activity by private initiative are affected by a thusand acts of government done for other than economic ends. 5. The Alleged " PlanUsmess" of Production With technical experts to guide the making of goods, business experts to guide the making of money, lenders to review all plans requiring large invest- ments, and government to care for the public welfare, it may seem as if the money economy provides a staff and a procedure adequate to the task of directing economic activity, vast and difficult as that task may be. This 38 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA impression is strengthened by observing that each class of business leaders is spurred to efficiency and deterred from recklessness by danger of pecuniary loss. The engineer who blunders is discharged, the enterpriser who blunders goes into bankruptcy, the lender who blunders loses his money. Thus the guides who misdirect the industrial army are always being eliminated from the number of those who lead. On the other hand, those who succeed are always being promoted to posts of wider power. The successful engineer is trusted with larger commissions, the successful enterpriser uses his profits to extend his business, the successful investor has more money to lend. With this powerful stimulation of individual efficiency, the money economy unites an opportunity for cooperation on a grand scale. By paying money prices, the leaders can enlist the aid of laborers who contribute work of all kinds, of expert advisers who contribute special knowledge, of landlords who contribute the uses of their property, and of investors who contribute the uses of their funds. And all these classes can be made to work in disciplined order toward the execution of a single plan. This union between encouragement of individual efficiency and opportunity for wide cooperation is the great merit of the money economy. It provides a basis for what is unquestionably the best system of directing economic activity which men have yet practiced. Nevertheless, the system has serious limitations. 1. The money economy provides for effective coordination of effort within each business enterprise, but not for effective coordination of effort among independent enterprises. The two schemes of coordination differ in almost all respects. Coordi- nation within an enterprise is the result of careful planning by experts ; coordi- nation among independent enterprises cannot be said to be planned at all; rather is it the unplanned result of natural selection in a struggle for business survival. Coordination within an enterprise has a definite aim — the making of profits; coordination among independent enterprises has no definite aim, aside from the conflicting aims of the several units. Coordination within an enterprise is maintained by a single authority possessed of power to carry its plans into effect ; coordination among independent enterprises depends on many different authorities contending with each other, and without power to enforce a common programme except so far as one can persuade or coerce others. As a result of these conditions, coordination within an enterprise is characterized by economy of effort ; coordination among independent enterprises by waste. In detail, then, economic activity is planned and directed with skill; but in the large there is neither general plan nor central direction. The charge that "capitalistic production is planless" therefore contains both an important element of truth and a large element of error. Civilized nations have not yet developed sufficient intelligence to make systematic plans for the sustenance of their populations ; they continue to rely on the badly coordinated efforts of MITCHELL: BUSINESS CYCLES 39 private initiative. Marked progress has been made, however, in the skill with which the latter efforts are directed, and also in the scale on which they are organized. The growth in the size of business enterprises controlled by a single management is a gain, because it increases the portion of the field in which close coordination of effort is feasible. 2. But, as pointed out above, the managerial skill of business enterprises is devoted to making money. If the test of efficiency in the direction of economic activity be that of determining what needs are most important for the common welfare and then satisfying them in the most economical manner, the present system is subject to a further criticism. For, in nations where a few have incomes sufficient to gratify trifling whims and where many cannot buy things required to maintain their own efficiency or to give proper training to their children, it can hardly be argued that the goods which pay best are the goods most needed. It is no fault of the individual business leaders that they take prospective profits as their own guide. On the contrary, they are compelled to do so ; for the men who mix too much philanthropy with business soon cease to be leaders. But a system of economic organization which forces men to accept so artificial an aim as pecuniary profit cannot guide their efforts with certainty toward their own ideals of public welfare. The business man- agement of single enterprises may be admirably systematic in detail ; but it is controlled by no large hinnan purpose. 3. Even from the point of view of business, prospective profit is an uncer- tain, flickering light. For it has already been shown that profits depend upon two variables — on margins between selling and buying prices and on the volume of trade, — related to each other in unstable fashion, and each subject to per- turbations from a multitude of unpredictable causes. That the system of prices has its own order is clear ; but it is not less clear that this order fails to afford certainty of business success. Men of long experience and proved sagacity often find their calculations of profit upset by conjunctures which they could not anticipate. Thus the money economy confuses the guidance of economic activity by interjecting a large element of chance into every business venture. 4. The hazards to be assumed grow greater with the extent of the market and with the time which elapses between the initiation and the fruition of an enterprise. But the progress of industrial technic is steadily widening markets, and requiring heavier investments of capital for future production. Hence the share in economic leadership which falls to lenders, that of reviewing the various chances offered them for investment, presents increasing difficulties. And, as has been shown, a large proportion of these lenders, particularly of the lenders on long time, lack the capacity and the training for the succesful performance of such work. These defects in the system of guiding economic activity and the bewildering complexity of the task itself allow the processes of economic life to fall into 40 MEMOIRS OP THE UNIVERSITY OP CALIPORNIA those recurrent disorders which, constitute crises and depressions. Much patient analysis, however, is required to discover just how these disorders arise, and why, instead of becoming chronic, they lead after a time to the return of prosperity. V. International Diffeeenges in Economic Organization 1. The Fundamental Similarity of Organisation In its broader features, the economic organization of the United States, England, France, and Germany is substantially the same. Money economy prevails in all four countries. In each the business enterprise is the dominant form of organization for making money, and in each the business enterprises engaged in wholesale trade, manufactures, mining, lumbering, transportation, and finance show a higher degree of development than the business enterprises engaged in handicraft, petty trade, farming, and the professions. Everywhere the business enterprises, though nominally independent, are so bound together by industrial, commercial, and financial bonds that "the injury of one is the 'concern of all." Everywhere the making of goods is subordinated to the making of money, so that economic welfare depends on the prosperity of busi- ness. Everywhere economic activity is directed by technical experts, enter- prisers, investors, and governments, and everywhere there exists the same combination of careful planning within each business enterprise and lack of a general plan for the guidance of all enterprises. Finally, the organization of the system of prices and its role in the business world, the influence on profits exercised by the volume of trade and the factors which condition it, the character of the means of payment in use, and the dependence of business upon savings and investment are much the same in Western Europe as in North America. The framework of economic culture, in short, belongs to no one country. But this substantial uniformity of general scheme does not preclude a myriad of differences, in detail. Those of chief moment for the theory of business cycles appear to be the following. 2. The Relative Importance of Different Industries A larger proportion of the English population is engaged in manufacturing industries than in any of the other countries, and conversely a smaller pro- portion is engaged in agriculture. Hence the business prosperity of England depends less on the prosperity of her farmers than is the case in France, MITCHELL: BUSINESS CYCLES 41 Germany, or the United States.'" On the other hand, foreign commerce is greater both relatively and absolutely in England than in our other countries, and consequently English business cycles are affected in exceptional degree by the state of foreign markets. 3. Thrift and Enterprise The French have decidely less of the spirit of business enterprise than the Americans, English, or Germans. Their railways could not be built without a state guarantee of dividends ; their merchant marine relies on bounties ; their great credit companies, founded largely for the establishment of new enter- prises, have gone over to the less hazardous business of accepting deposits and handling investments for customers ; their private banks are concerned mainly with transactions in foreign exchange and short-time credits. The Frenchman has less liking than the men of the other countries for the game of business. He aims to secure a competency by thrifty conduct of business along familiar lines, and then to retire and invest his accumulations in rentes. Hence French business does not exhibit striking alternations of prosperity and depression, and French crises are not severe." On the other hand, the French surpass the people of the three other nations in thrift. In recent years France has displaced England as the world's great lender. For the relative lack of business enterprise, combined with the enor- mous aggregate of small savings, provides each year hundreds of millions of francs which seek investment in foreign securities. And the French exhibit their characteristic business conservatism in the selection of investments. Occasionally they may buy freely of speculative stocks, like "Kaffirs"; but the bulk of their savings goes into public securities, high grade railway and industrial bonds, or into the stocks which are most firmly established as divi- dend payers.'^ 10 The Statistisches Jahrbueh fiir das Deutsche Seich, 1909, p. 14,* gives a classification of breadwinners in different countries from which the following figures are taken: United England German States and Wales France Empire Date of census 1900 1901 1901 1907 Agriculture, forestry and fishing 35.9% 8.8% 41.8% 35.2% Manufactures and mining 24.1 48.0 35.5 40.0 Trade and transportation 16.3 23.0 9.5 12.4 other occupations 23.7 20.2 13.2 12.4 100.0 100.0 100.0 100.0 Differences in tlie methods of classifying occupations adopted in the several censuses make this compar- ison trustworthy only for the most general conclusions. The American figures for "other occupations," for example are unduly large because of the great number of "laborers, not specified"; the Preach figures for •Manufactures and mining" are swollen and the figures for "Trade and transportation" diminished by put- ting persons engaged in transportation under the former caption, etc. 11 Compare K. Wiedenf eld, ' ' Das Persiinliche im modernen Unternehmertum, ' ' SchmoUer 's Jahrbuch fiir Gesetzgelung, 1910, pp. 229-233. 12 Compare, for example, A. Neymarck, "French Savings and their Influence," Publications of the Na- tional Monetary Commission (Senate Document, no. 494 61st Congress, 2d Session), pp. 163-181. 42 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA 4. Banking Si/stems and Monetary Habits Again, the United States has a banking system unlike that of the other countries. England, Prance, and Germany each has a great central bank, sustaining peculiar relations to the public treasury on the one hand and to the money market on the other hand. Among the other banks a network of branches has been rapidly developed, partly by amalgamation of independent institutions, partly by the establishment of new offices. The branches as a rule depend for their reserves upon the head offices — which are mainly in London, Paris, and Berlin — and the head offices in their turn carry a large part of their reserves in the central bank. The latter institution, therefore, bears a heavy load of responsibility and exercises a corresponding influence upon the policy of the other banks with reference to discount rates, extension or contraction of loans, and the like. In this country, on the contrary, there are about 29,000 banks, legally independent of each other, of small average size, and carrying a much larger percentage of reserves in ready money in their own vaults than is customary elsewhere. The banks in a country district redeposit a part of their reserve funds with the larger institutions of their local metropolis, and the banks of the latter towns in turn make similar redeposits in Chicago, St. Louis, and particularly in New York. But the business bonds thus established between the country banks and those of our foremost financial centers still leave the organization of the banking sj^stem as a whole far looser than that of the three other countries. Moreover, there is no central bank in New York or elsewhere to play the role of the Bank of England, the Bank of Prance, or the Reichsbank. With respect to the issue of notes, also, our banking system is peculiar. The central bank has a monopoly of issue in Prance, and a position of unques- tioned primacy among all the banks of issue in England and Germany. Here the national banks are secured monopoly by a prohibitive federal tax on the notes of other banks. But there are several thousands of these national banks, each deciding its own policy with reference to issue. The legal requirement of depositing United States bonds as security with the federal treasurer interposes a most effective check upon elasticity of circu- lation. It is still uncertain whether the attempt to provide "emergency circu- lation" by means of the Aldrich-Vreeland act would afford adequate relief in a crisis, but that act certainly gives no help in ordinary times. Prance and Germany, on the contrary, have bank-note systems which make it easy to increase or diminish the issues in accordance with the changing activity of business. The Bank of England, however, is confined within limits even more rigid than those imposed upon the national banks of America. Save in the case of the most severe panics, increase of circulation in England requires an increase in the gold holdings of the bank. MITCHELL: BUSINESS CYCLES 43 But both in England and the United States, the relative inelasticity of the bank-note circulation makes less trouble than it would make in France or Germany. For the people of the two Anglo-Saxon nations are accustomed to make much freer use of bank checks in their business dealings. In corre- sponding measure, they make less use of bank-notes than do the French and Germans. 5, The Government's Share in Directing Economic Activity Finally, there are considerable differences among our four countries in the extent to which both central and local governments participate in the direction of economic activity. Partly because of the limitations placed by constitutional law upon the powers of government, partly because of a temperamental restiveness under control, Americans have not made such bold or successful experiments in munic- ipal ownership of public utilities or in state ownership of railways, telegraphs, telephones, mines, and the like as have the Germans, French, or British. At the present moment, however, this difference promises to grow narrower, because of the efforts to regulate business enterprise by public commission, and even to extend public undertakings into fields hitherto sacred to private enterprise. While the sequel shows that these differences of economic organization and habit possess some significance, still they are far less important than the more fundamental points of agreement. For present purposes the chief result of this similarity of organization is that business cycles run a similar course in all four countries. The next task is to sketch these cycles in the period since 1890. CHAPTER III THE ANNALS OF BUSINESS, 1890-1911 Annals are of necessity dull; for in a year by year record of events it is impossible to develop clearly the interrelations which by binding events into coherent clusters make them significant and interesting. Nevertheless, in order to interpret the elaborate tables of statistics which follow, it is necessary to know the business conditions prevailing in each of our four countries in each year since 1890. Readers willing to accept conclusions without a scrutiny of the evidence, however, may content themselves with the chronological summary of events given in the final section of this chapter. And readers familiar with recent business history may skip the whole chapter ; for it offers little more than a digest of what leading financial journals have reported every year concerning the state of trade in America, England, Prance, and Germany. I. The Business Cycles op 1873 to 1889 The crisis of 1890, the first event of the period selected for detailed exami- nation, is best explained by a brief preface concerning the business cycles of the two preceding decades. 1. The Crisis of 1873 The crisis of 1873 began in May with a panic in Vienna, where the great Austrian "boom" had been increasing its headway since the later sixties. Germany had entered enthusiastically upon a similar course of business expan- sion almost before its victorious war with France was over. Accordingly, the crash in Vienna caused a serious strain in Leipzig, Frankfurt, Hamburg, and Berlin. But the summer passed without disaster and confidence was returning when news came in September that panic had broken out in New York. In America rapid railway building had been the chief feature of the preceding years of activity, and the receiverships of railways and embarrassments of their financial backers were conspicuous features of the panic. The business fabric of Germany, weakened by domestic speculation, and strained by losses in Austria, was unable to withstand . this new shock, A crisis followed, though it was less severe than the panics in Austria and America. [44] MITCHELL: BUSINESS CYCLES 45 England, like Germany, was involved in the disasters of American railways, and London suffered a severe strain in the autumn. But the domestic business of England was in more solid condition than that of Grermany — largely because the acute crisis of 1866, when the great banking house of Overend-Gurney failed, had prevented the English from joining heartily in the "boom" of 1870-72. But though England had no panic in 1873, her best customers were crippled, and in 1875 a severe depression began. Of all the great nations, Prance was least affected by the crisis of 1873. She bought her immunity from business disaster, however, at a great price — the military reverses and civil disorders of 1870-71, which prevented her people from cultivating a "boom" of their own, and from participating heavily in foreign speculation.^ 2. The Later Seventies and Early Eighties The period of business depression which followed the crisis lasted in the United States until the summer of 1879. Then harvest failures in Europe and a favorable season at home enabled our farmers to export unprecedented quan- tities of breadstuffs at high prices. Prosperity among the farmers and the grain-carrying railways promptly increased the demand for commodities of many kinds, and made business brisk for merchants, manufacturers, and pro- ducers of raw materials. This tide of prosperity rose through 1880 and 1881 to its culmination in 1882, when a recession in business activity began. 1883 was a year of declining volmne of business ; but it was not until May, 1884, that the cj'isis became acute. While severe in the financial circles of New York, and accompanied by heavy bankruptcies, this crisis was less general in its scope and less disastrous in its after effects than that of 1873.^ The harvests of 1879, which brought back prosperity to the United States, intensified the business depression in Europe. But presently American pros- perity increased the demand for many European exports. England seems to have felt the effects of this stimulating factor most sensibly; but even there the expansion of business was confined chiefly to the iron, steel, and shipping trades. Before activity had become general, the turn of the tide in the United States checked the movement, and business relapsed again into dullness.'' In Germany, the depression which followed 1873 continued in a mild form until the end of the eighties.* But France, where the check had come in 1870, began to show signs of business activity as early as 1876. The recovery was attended by active company promotion and widespreading speculation on the 1 Max Wirth, GesohicMe der BandelsTcrisen (ed. 3, 1883), pp. 450-614. 2 A. D. Noyes, Forty Years of American Finance, pp 53-61, 96-101. 3 Final Eeport of the Eoyal Commission to inquire into the Depression of Trade and Industry. Decem- ber, 1886. *Sombart, Die deutsche VolTcswirtschaft im Neunzehnten Jahrhundert (ed. 2, 1909), p. 91. 46 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA stock exchanges, and ended in the crisis of January, 1882. Paris, Lyons, and Vienna were the centers most affected; but the reaction in Prance doubtless helped to check the forward movement in England and the United States." 3. Business Expansion in the Later Eighties and the French Crisis of 1889 The period of depression in America after the crisis of 1884 was remark- ably brief, probably because the crisis had been preceded by more than a year of moderate liquidation. Statistical indices of the volume of business make 1885 the dullest year of the decade; but the recovery was so prompt that the Commercial and Financial Chronicle declared 1886 to be the best business year since 1880. Rapid railway building was the chief feature of the revival. According to Poor, the annual increase in railway mileage rose from 2,975 miles in 1885 to 12,876 in 1887. Thereafter it declined to an average of 5,830 miles in 1888-90. But business continued to prosper during these closing years of the decade, despite troubles in the speculative markets, rate wars among the railways, and extensive strikes. General prosperity and the negotiation of large blocks of railway securities abroad produced enormous importations of merchandise. In their turn, the large imports yielded the federal government a surplus revenue exceeding 100 millions in each of the fiscal years 1887 to 1890. The independent-treasury system made an artificial problem out of this excess of receipts over expend- itures ; for, in spite of purchases of government bonds at high premiums, pre- payment of interest on the public debt, and large deposits in national banks, the money market suffered from the locking-up of funds in the government vaults. As a solution, the Democrats proposed a reduction of the tariff, the Republicans a further substitution of protectionist for revenue principles, and an increase of pensions. In the presidential election of 1888 Harrison defeated Cleveland, and the victorious Republicans in 1890 passed the McKinley tariff and the Sherman silver-purchase act. The first measure raised the average rates of duty to the highest pitch yet attained, put sugar on the free list, and provided a bounty to American sugar interests. The second measure was expected nearly to double the quantity of silver bought by the treasury. Combined with lavish expenditures upon pensions, etc., these two laws made a great reduction in the surplus revenue." They also produced effects upon business which their authors did not foresee. Meanwhile the long depression in England had ended in 1886 or 1887. Again, American prosperity gave a strong impetus to revival, particularly in the coal, iron, and shipping trades which were stimulated by the enormous railway building of 1886 and 1887. But this time prosperity spread to other 5 Juglar, Des crises commerciales (ed. 2, 1889), pp. 435-443. 8 Noyes, op. cit., chs. v and vi. MITCHELL: BUSINESS CYCLES 47 trades and England entered upon a period of active business expansion. Accumulations of capital, which according to the Royal Commission upon the Depression of Trade and Industry had continued to be made even during the hard times, came forward freely for investment. Promoters took advantage of the increasing confidence and the moderate rates of interest to launch a long series of new companies. Beginning with the conversion of private British enterprises — particularly breweries — into joint-stock companies, they presently undertook similar operations in Germany, Austria, and the United States. Mines of all sorts in all quarters of the world, Chilean nitrate deposits, and railways in North and South America came into favor. Presently "trust and investment companies" were floated to promote, underwrite, and speculate in the stocks of other companies. But most important of all were the speculative investments in Argentina, where a land "boom" and a mania for internal improvements, financed by foreign capital, Avere in full swing. German business experienced a similar but more moderate uplift at the close of the eighties. For a while the Germans bought "Argentines" freely, but presently they became uneasy, resold most of their holdings, and turned to speculation in the shares of domestic enterprises. As a consequence of the eager demand for such securities, the capital of the joint-stock companies organized in Germany rose from $13,000,000 in 1885 to $101,000,000 in 1889. After her crisis in 1882, Prance did not enter upon a new period of business expansion until about 1887. The most spectacular episode of the next three years was the rise and fall of the "copper ring." The Societe des Metaux made contracts with the chief copper producers in various countries to take their output for three years at £70 per ton, planning to hold the selling price at £80. It estimated the annual output at about 150,000 tons per annum, so that the cost price would reach about £10,500,000. One of the great French banks, the Comptoir d'Escompte, undertook to make the necessary advances upon the security of the metal bought. But experience showed that the selling price of £80 caused a large decline in the consumption of copper. Meanwhile, the high buying price stimulated production. In order to retain control of the market, the ring was compelled to buy the output of mines which had not entered into contracts with it, and was further embarrassed by the unexpectedly large quantity of scrap copper which was offered. By March, 1889, the Societe des Metaux found itself with an unsold stock of 160,000 tons of copper, which at £70 per ton had cost £11,200,000. The Comptoir d'Escompte was involved by its enormous advances in the ill fate of the Societe. The end came when the Russian government in March, 1889, tried to withdraw its, deposits from the Comptoir. To prevent a disastrous panic, the Bank of France undertook the liquidation of the Comptoir, and the Societe des Metaux went into bankruptcy. Meanwhile the Panama Canal Company, which had absorbed many millions 48 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA of French capital, suspended operations. These two disasters checked French speculation early in 1889. Business returned to a highly conservative basis, and the Bank of France began the accumulation of the immense reserves which enabled it to assist the Bank of England so effectually in 1890.' II. The Crisis of 1890 and the European Depression of 1891-94^ 1. The Crisis of 1890 The financial crisis of 1890 brought this period of business expansion to a close in England, Germany, and the United States. Indeed, before 1889 was out the English and Glerman money markets had become stringent. In both countries the central banks raised their discount rates to 5 per cent in the autumn, and on December 30th the Bank of England made a further advance to 6 per cent. These high rates were recognized as danger signals ; men began to wonder whether a crisis was at hand, and in a measure checked speculation. But the winter and spring passed without disaster; the bank rates fell again to 4 per cent in Berlin and 3 per cent in London, and the speculative spirit was reviving, when news came of political unrest in Argentina. British investors became uneasy about their "Argentines," and the financial houses which had unsold issues on their hands, or had committed themselves to new flotations, found increasing difficulty in marketing their holdings. These complications led to fresh advances in the discount rates, to the unloading of high class secur- ities by houses which lacked funds, to sharp declines in stock prices, and to growing distrust. The climax came in England when on the 15th of November the failure was announced of Baring Brothers and Company, one of the greatest private banking houses of London, which had become involved through over-heavy commitments in Argentina. A serious panic might have followed had not the announcement of the failure been coupled with the announcement that the Bank of England, supported by a huge fund subscribed by other financial enterprises, would guarantee the payment of Baring's liabilities. As a further precaution, the bank borrowed £3,000,000 from the Bank of France and £1,500,000 from the Russian treasury. These preparations proved ample to control the situation : a panic was averted, but business liquidation began. The collapse in Argentina had little direct importance for Germany; but the German money and stock markets sympathized with the summer troubles of the English. When the Barings failed the situation became more tense. In Berlin as in London a panic was averted ; but the incipient business depres- sion spread and became deeper. 7 One of the best accounts of these developments in England, France, and Germany is that published by Max Wirth in the Journal of Political Economy, March, 1893. 8 This and the following sections are based mainly upon the Financial Beview (New York), the Economist (London), and Eaffalovich 's annual Le Marche Financier (Paris). When other sources are drawn upon ref- erences are given. MITCHELL: BUSINESS CYCLES 49 Much the same was true of New York. Americans were not heavy investors in Argentina, but they were heavy borrowers of European funds. It is prob- able that some hint of the embarrassment of the Barings was received by certain New York houses as early as August," and that foreign investors sold large blocks of American stocks to protect their other holdings. It is certain that gold exports were heavy, that the New York banks held less than the legal 25 per cent reserves in eleven out of the twenty weeks from the middle of August to the end of the year, that call loan rates rose frequently to 6 per cent per annum plus one-half per cent a day, that commercial loans became exceed- ingly difficult to negotiate, and that clearing-house loan certificates were issued. But New York succeeded, like London and Berlin, in avoiding a panic. France came off better from the financial troubles of 1890 than the other three countries. The great Parisian failures of March, 1889, had effectually checked speculation, and business had been conducted upon a basis so conserv- ative that it could withstand even the strain of the Baring failure. Despite the financial crisis, general business prospered in 1890. The Financial Revietv said concerning the United States: "The year .... was one of great activity in the various departments of trade and transportation, with a volume of transactions never before equalled. ' '" The London Economist was a little less emphatic about English business: ' ' A year of great financial disturbance, but nevertheless, so far as this country is concerned, of moderate commercial prosperity — such, in brief, is the record of 1890."" Study of the various statistical indices of volume of business shows that the situation in Germany and France was like that in England. 2. The Depression of 1891-94 in Europe But in the years which followed business of all kinds was overtaken by depression. The year 1891 was a year of financial prostration in England. In Germany there was much complaint at the small demand for goods of all kinds. Though France was less affected by the crisis, she suffered with the others from the wretched harvests, which intensified the depression in Europe. In 1892 both foreign and domestic trade fell off in England, the farmers had poor crops and low prices, and wage-earners suffered from reductions in pay and from unemployment. Germany was perhaps worse off than England, and while France continued to be least affected, even her commerce and industry were reported as stagnant and the year as ending in gloom and lassitude. 8 "The Crisis of 1890," Economic Journal, March, 1891, pp. 192-196. 10 P. 1. 11 "Commercial History and Review," February 21, 1891. 50 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA The Economist pronounced 1893 to be a bad year all around. Great strikes in the cotton and coal trades, heavy losses in the Australian and American panics, the financial embarrassments of several governments whose securities were widely held in Britain, another season of short crops and low prices for the farmers, severe suffering among wage-earners, and a marked increase in pauperism made a black record. Germany fared better than England this year because her crops were larger; but, save for the first quarter when false hopes were built upon monetary reforms in Austria, the business public was in a mood of deep discouragement. The French, too, complained of mediocre business and languid security markets; but their harvests were fair, and French investors were less involved than British and German in the extra- European panics. The year 1894 opened in hope, but closed in fresh disappointment. The poor English farmers had another wretched season ; yields were abundant, but a rainy harvest left the cereals in bad condition, and prices were almost unprecedently low. The physical volume of trade increased, but prices con- tinued to fall, and business was done on such a narrow margin of profit that the feeling of depression was not relieved. Fuller employment, however, less- ened the distress among wage-earners in a measure. The one hopeful spot in the business world was the stock market, where a "boom" in South African gold mines developed in the closing months, and a general increase of invest- ment demand began to appear. German reports upon 1894 show less hesitation in recognizing improvement over 1893. Large subscriptions to government loans were followed by a demand for industrial stocks, particularly shares in electrical and chemical enterprises. But commerce and manufactures could be called better only in comjoarison with 1893; they were not good. France presents a similar picture. The capital which found no employment in ordinary business channels because of the depression flowed toward the bourse. Meanwhile the refunding of billions of public securities at lower rates of interest tempted investors to dally with more lucrati^^e stocks. The African gold mines became the mania of the day ; though Spanish, Italian, and Portu- guese securities also enjoyed high favor. But while the bourse was highly prosperous, commerce recuperated slowly. The volume of trade was held to be greater than in 1893, but smaller than in 1892. This period of liquidation, which began in France in March, 1889, in Ger- many and England toward the end of that year and more definitely in 1890, came to a close in 1895. The lowest point seems to have been touched in 1893. The incipient and partial improvement of 1894, decided only in the investment markets, developed next year into a general business revival, strong enough to resist several serious shocks. But before dealing with the new period of business prosperity which began in 1895, it is necessary to describe the business events of 1891-97 in the United States. MITCHELL: BUSINESS CYCLES 51 III. The Panic or 1893 and the Depression of 1894-96 in the United States 1. The Business Years 1891 and 1892 The first seven months of 1891 in America was a period of liquidation after tlie crisis of 1890, similar in character to the same period in England. But midsummer brought a dramatic change in the business situation. As in 1879, the country was suddenly lifted from depression to prosperity by the concur- rence of bad harvests in Europe and abundant harvests in America. The first beneficiaries of this stroke of fortune, the farmers and railways, bought goods with freedom, stimulating trade, manufacturing, mining, etc., in almost all lines. The impetus thus given to business activity by the harvest situation of 1891 distorted the parallelism of business history in this country and in Europe. While liquidation was proceeding unchecked in England, France, and Germany, the Financial Beview reported that in the United States the volume of business transactions in 1892 was greater than ever before." But this contrast did not last long. The crops were smaller and agricul- tural prices were lower in 1892, and much concern was caused by the enormous outflow of gold in the second half-year. Uneasiness increased in the early months of 1893. The net gold exports were 11 millions in December, 12 in January, 13 in February, 2 in March, 18 in April, and 15 in May — a total of 71 million dollars in six months. Meanwhile heavy failures occurred, partic- ularly the Philadelphia and Reading Railway on February 20, and the National Cordage Company on May 4. The collapse of practically all the banks in Australia intensified distrust and increased the difficulty of securing financial help from London. In May one of the most violent panics in the country's history broke out. 2. Contemporary Explanations of the Panic of 1893 Several explanations of this panic were given by contemporaries. Repub- licans, like Speaker Reed, assigned as cause the fear of tariff reductions aroused by the sweeping Democratic victories in the autumn of 1892.'' Democrats, like Grovernor Russell of Massachusetts, retorted that Republican legislation and extravagance were responsible." Others classified the panic of 1893 as an economic crisis of the common sort produced by speculation, over-production, or under-consumption.'' But the prevalent view was that the panic had been brought about by doubt concerning the maintenance of the gold standard." 12 1893, p. 1. 13 North American Review, September, 1893. 1* Ihid., December, 1893. 15 For example: Gibson, Forum, June, 1893; unsigned article in Forum, November, 1894; Irwell, Chautauquan, ^°i^6"Taussis Economic Journal, December, 1893; Carnegie, North American Review, September, 1893; Smith, Wilson and Bloss, ibid., October, 1893. On the contrary, free-silver advocates often charged the panic to a con- sDiraev on the part of the "gold ring": Stewart, North American Beview, November, 1893; Knapp, American Journal of Politics, June, 1894; Schuckers, The New Torle National Bank Presidents' Conspiracy. 52 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA 3. The Influence of the Sherman Silver-purchase Act The Sherman Act of July 12, 1890, required the secretary of the treasury to purchase 4,500,000 ounces of silver each month, and to issue legal-tender treasury notes in payment. This act produced fresh issues of paper money, amounting to 24 millions in 1890, 53 in 1891, 47 in 1892, and 24 in the first half of 1893. Prom the beginning the London Economist declared that the whole tendency of this measure was towards constituting silver the basis of our currency, and that the monthly additions of paper money to the circulation, irrespective of the changing business requirements, would result in the expulsion of gold whenever times should become dull." Foreign capitalists, made timid by their recent losses in Argentina, were in a mood to listen to such warnings. Con- tinued agitation of the silver question in Congress, where the Senate passed a free-coinage measure in July, 1892, intensified their fear of a relapse from the gold to a silver basis. Hence foreigners not only stopped buying American securities, but also endeavored to unload their old holdings upon the New York market. This process accelerated the expulsion of gold which the Economist had prophesied. From February to July, 1891, the exports of gold exceeded imports by nearly 74 millions. The crop situation of the autumn, however, gave the United States so huge a balance on merchandise account as to reverse the flow of gold, and by January, 1892, the country had regained some 39 millions. But, once the extraordinary European purchases of breadstuffs declined, the out- flow began again, and from February to September the net losses of gold were 52 millions. This year the autumnal exports of agricultural produce were less than usual, and sufficed to give the country an excess of gold imports for but two months, October and November, when the gain was only 4 millions. Meanwhile the unports of foreign merchandise had increased. In December, 1892, the outflow of gold began again, and by the end of June 73 millions more had been lost. Putting these figures together, we have net exports of gold from February, 1891, to Jime, 1893, aggregating about 155 million dollars. Mean- while, however, American gold mines had been adding to the supply, so that the net decline in the monetary stock of gold was from 648 millions on January 1, 1891, to 532 millions on June 30, 1893 — a loss of about 116 millions — over one-sixth of the whole." 17 December 20, 1890, p. 1596; December 26, 1891, p. 1648; July 9, 1892, p. 881. 18 The figures embody the corrections in the estimates of the gold stock made by the Director of the Mint in his report for 1907, pp. 66-87. See the tables of the monetary stock of gold in chapter vi, below. MITCHELL: BUSINESS CYCLES 53 4. The Decline of the Gold Beserve This loss of gold was the more serious because it threatened a suspension of gold redemptions by the treasury, and hence a depreciation in the gold value of the dollar. Before the passage of the Gold Standard Act of 1900, the gold reserve consisted simply of the unexpended balance of gold in the treasury. No law had fixed the amount to be held, or provided specifically for obtaining more gold when the reserve ran low. But public sentiment, based upon treasury practice and certain incidental clauses of monetary statutes, had fixed upon the round sum of 100 millions as the minimum balance consistent with safety. At the end of February, 1891, the treasury held almost 150 millions. Certain domestic conditions combined with the export of gold to reduce this fund. A decline in public revenues and a heavy increase in public expenditures cut down the surplus revenue from 94 millions in 1890 to a deficit of 39 millions in 1893.^° Of course this change reduced the treasury's ability to carry a large balance of unexpended money. More serious was the spread of distrust in financial circles at home regarding the government's ability to maintain redemptions of the paper money. As early as January, 1891, the Bankers' Magazine noted that fear of free coinage of silver made people in possession of gold slow to part with it. In the following months banks and other lenders began inserting in notes and mortgages clauses requiring payment in gold coin or its equivalent.^" Another result of the same distrust was that the banks began to supply depositors who withdrew funds for the payment of customs duties with paper money instead of with gold. This procedure cut off the most important source from which the treasury received gold for its reserve. In self-defense the treasury began to substitute legal-tender notes for gold in the payment of its debit balances at the New York clearing house. Then inter- national bankers, able to obtain nothing but legal tenders through clearing- house settlements, began to get gold for export directly from the treasury by presenting notes for redemption. The cumulative effect of these interrelated processes was to diminish the government's gold reserve. From the 150 millions of February 28, 1891, it sank to 118 millions on June 30. Then a respite was given by the great exports of wheat and the imports of gold. Moreover, the activity of internal business caused a lively demand for the small legal-tender notes and prevented them from accumulating in the banks, whence they could be sent back to the treasury through the customs houses. Hence the gold reserve rose to nearly 133 millions, and still stood at 131 millions on the last day of 1891. During 1892 the treasury had to face an increasing demand for redemptions. By the end of July it held 19 "Calendar Year Statements," Summary of Commerce and Finance, December, 1898, p. 1458. 20 Bankers ' Magazine, N. Y., vol. 25, pp. 497, 636, 675, 798. 54 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA only 110 millions of gold. But the demand for money to move the crops in the autumn again carried the legal tenders westward into general circulation and relieved the strain, so that the treasury was able to report a reserve of 121 millions on December 31. The relief was but temporary. With the beginning of 1893 the demand for redemptions assumed the proportions of a "run" for gold. In five months the treasury paid out 67 millions. Nothing but the volun- tary exchange of gold for notes by the New York banks in February, March, and April kept the reserve above the 100 million mark during the winter and spring. But such aid effected no more than a postponement of the result. On the 15th of April the secretary of the treasury gave public notice that the reserve had been reduced to what public opinion regarded as the danger-point, by announcing that the issue of gold certificates was suspended in accordance with the law which required such action whenever the gold in the treasury "reserved for the redemption of United States notes falls below $100,000,000."" By this act the distrust long felt by foreign investors and American financiers was converted into a general alarm among all classes. The grave doubt about the treasury's ability to maintain the parity between different kinds of money combined with distrust engendered by such business events as the failure of the Philadelphia and Reading and National Cordage to destroy business confidence." 5. Business Conditions and the Panic The panic of 1893, however, cannot be accounted for solely by the monetary situation. Certain unsound elements in business contributed to the smash. The crisis of 1890 was primarily financial in its origin and effects. On this side of the Atlantic, it was most severe in New York, and the liquidation of the first half of 1891 was most pronounced there. The interior sections of the country were drawn into the movement ; but before liquidation had progressed far it was checked by the sudden return of prosperity among the farmers. As a result, many weak enterprises, which must soon have retrenched radically or gone out of business, were tided over and allowed to continue their expansion. In short, the check given to the rising tide of prosperity was too brief to enforce . a thorough revision of credits. Superficially, the business situation in 1892 bore the impress of prosperity. The volume of business was greater than in 1891, or even in 1890. Such is the testimony of coal production, gross receipts of the railways, value of mer- 21 So serious was the alarm that the administration issued an announcement on April 24 that ' ' the Presi- dent and his cabinet are absolutely harmonious in the determination to exercise every power conferred upon them .... to preserve the parity between gold and silver and between all financial obligations of the Gov- ernment." 22 The various factors which cooperated to reduce the gold reserve can be followed month by month in the figures published by the Treasury. See, for example, Finance Report, 1902, pp. 241, 239, 247, 245, 185, 237, 99, 100, 235. For interpretations see Taussig, Economic Journal, June, 1892, pp. 362-369; Noyes, Forty Tears of American Finance, chapters vii and viii; Lauck, Causes of the Panic of 1893, chapters vi-viii. MITCHELL: BUSINESS CYCLES 55 chandise imported, and volume of clearings outside of New York. Bank loans were expanded, but without a serious reduction in the ratio of reserves to deposits. In New York the money market was "easy," with average rates less than in the two preceding years. The prices of bonds and stocks recovered from the decline they had suffered during the crisis of .1890, and the volume of sales was large. All this indicated an active but not a feverish state of trade. On the other hand, commodity prices were steadily declining — a most unusual accompani- ment for business prosperity ; and one which tended to restrain rather than to excite rash investment and wild speculation. Nevertheless, reports of specu- lation in farm lands and town lots came from many sections of the interior. New York's share in the movement was a lively interest in the stocks of new "industrials." The combination of independent manufacturing enterprises into enormous "trusts" had begun in the later eighties and continued on an increasing scale through 1892. Several of the most conspicuous among these combinations proved in the sequel to have been financed in a highly reckless manner. A few railway deals of like character were made. But the most dangerous element in the situation was probably the doubtful character of many bank loans. Had the liquidation begun late in 1890 been carried through, the banks would doubtless have written down or written off a considerable portion of the sums due them from embarrassed houses. The quick return of prosperity saved them from having to acknowledge these losses, but did not enable all the weak debtors to recuperate their strength. On the contrary, the banks seem to have thrown not a little good money after the bad. When the hour of need came they found it impossible to realize upon a considerable proportion of their nominal loans. On paper they were reasonably strong ; in reality many banks were very weak. The business situation was further undermined by the harvests of 1892. Except for cotton, the yields of the most important crops were fairly large — not so great as the "bumper" yields of 1891, but equal to or greater than the average. Low prices for agricultural products, however, made the year rather unprofitable for the farmers. Thus the stimulus which had turned depression into prosperity a year before was lacking in the autumn of 1892. The demand for goods from the agricultural sections began to decline ; railways, merchants, and manufacturers bought with less freedom, and all the disquieting elements in the situation from the decline of the gold reserve to the financial difficulties of the new industrial combinations and the doubtful character of bank loans had an unobstructed chance to work out their results.'' 23 The comparisons in this section which imply the use of statistics are all based upon tables in the fol- lowing chapters On the condition of the banks in 1890-93 see O. M. W. Sprague, Bistory of Crises under the National BanMng System, pp. 153-162. (Publications of the National Monetary Commission. Senate Document no. 538, 61st Congress, 2d session.) 56 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA 6. The Events of the Panic The panic broke out early in May, 1893. The appointment of receivers for the IS'ational Cordage Company on the fourth may be called the beginning. There speedily followed a crash of prices on the stock exchange, the failure of several large brokerage houses, extremely high rates for loans, bank failures in the west, further exports of gold accompanied by a further decline of the treasury's reserve, and two railway receiverships. President Cleveland was among the men who held the business panic to be an indirect result of the Silver-purchase Act of 1890. Even before his inaug- uration he had sounded the congressional leaders among the Democrats as to the possibility of securing a repeal. At the time he concluded that the majority of his own party stood against him. But sentiment changed after the panic began, and on June 30 he summoned Congress to meet in extra session on the seventh of August. The House of Representatives promptly acquiesced with Cleveland's wishes; but men from the silver-mining states obstructed action in the Senate for nearly three months, so that it was the first of November before the repealing act was signed. Meanwhile the panic had been running its course. The banks, despite an unprecedentedly general issue of clearing-house loan certificates, generally lim- ited or suspended payments. Money commanded a premium for many weeks, and illegal substitutes for cash were freely put into circulation." Business failures were more numerous and liabilities larger even than in 1873. Over three hundred banks closed their doors, and 29,340 miles of railway went into the hands of receivers."'^ Stocks fell heavily in price; interest rates on com- mercial paper were quoted as high as 12 to 18 per cent, and for a time in June loans could hardly be procured at all. The lack of money for pay-rolls, diffi- culty of collections, and fear lest customers would be unable to meet their contracts caused widespread limitation or cessation of production. Unemploy- ment assumed vast proportions, and reacted in a most depressing fashion upon the demand for goods at retail and wholesale.^" 7. The Struggle to Maintain the Gold Reserve after the Panic The business depression which followed upon the panic of 1893 was compli- cated by the continuing uncertainty about the- monetary standard. Though Congress had yielded to the intense pressure of public opinion while the panic was still on and repealed the silver-purchase law, it stubbornly refused to enact the measures which President Cleveland recommended to entrench the 2-4 See Warner, "The Currency Famine of 1893," Sound Currency, 1896, A Compendium, pp. 337-356. 25 Table from the Sailway Age, reprinted in Statistical Abstract, 1904, p. 406. 26 See A. C. Stevens, ' ' Analysis of the Phenomena of the Panic . . . . " Quarterly Journal of Economics, January, 1894; C. C. Closson, "The Unemployed in American Cities," ibid., January and July, 1894. MITCHELL: BUSINESS CYCLES 57 gold reserve after the panic was over. Consequently the treasury's stock of gold remained subject to the influences which had depleted it between 1890 and 1893, save that the automatic injection of legal-tender notes into the currency each month by buying silver was stopped. On the other hand, the deficit in the government's revenues became chronic — 39 millions in 1893, 59 in 1894, 30 in 1895, and 49 in 1896 — and of course a deficit made it impossible to maintain a working balance in any kind of funds without borrowing. Moreover, the depression of business which prevailed most of the time prevented the legal- tender notes already outstanding from being absorbed into active circulation. Meanwhile, the losses of gold by excess of exports continued — 81 millions in 1894, 71 in 1895, and 28 in the first seven months of 1896. The sums of legal- tender notes which the treasury was forced to redeem in gold were even larger —142 millions in 1894, 131 in 1895, and 100 in the first seven months of 1896." In all this time practically no gold was received through the customs house, and practically none was paid out through the clearing house. Against these adverse conditions the administration had to contend in its efforts to prevent the gold reserve from complete exhaustion. December 31, 1893, the reserve was but 81 millions. Unable to secure new legislation from Congress, the administration resorted to the issue of bonds redeemable in coin, not necessarily gold, under a provision of the law passed in 1875 to provide for the resumption of specie payments. In January, 1894, Secretary Carlisle sold $50,000,000 of 5 per cent ten-year bonds for $58,700,000. Despite the fact that much of the gold paid for these bonds was obtained from the treasury itself, through the presentation of legal-tender notes for redemp- tion, the proceeds temporarily raised the reserve above 100 millions. But the processes of depletion ran on unchecked, and by July 31 the reserve was lower than ever — 55 millions. The usual autumnal importations of gold allowed the reserve to gain 6 millions net between July and the end of October ; but in November a second 50-million bond issue became necessary. Again the proceeds — $58,500,000 — carried the reserve above 100 millions for a little time ; but again the outflow rapidly exhausted the new supplies, so that by January 31, 1895, the balance stood at 45 millions. In February President Cleveland contracted with a syndicate of bankers to take about $62,400,000 of 4 per cent thirty-year bonds in return for $65,100,000 of gold. The syndicate undertook to obtain at least half of the gold in Europe, and to protect the treasury so far as possible from withdrawals of gold for export. Monthly deliveries upon this contract brought the reserve up to 108 millions by the end of June. But at this point the efforts of the sjradicate to check the outflow of gold by satisfying the export demand with drafts upon London broke down, and once more the treasury began to lose ground. In December President Cleveland's belligerent message regarding 2T All of these figures are for calendar years. 58 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA British intervention in Venezuela intensified the difficulty by causing an extra- ordinary return of American securities from London. By the end of January, 1896, the reserve was reduced to 50 millions once more. But President Cleveland had already acted, by calling early in the month for popular subscriptions to a loan of $100,000,000 on 4 per cent bonds. The proceeds were 111 millions of gold. While about 40 millions of this sum had been obtained by subscribers from the treasury itself, the reserve was raised to the highest point since December, 1891 — 129 millions on March 31. More- over, the large subscriptions to this loan did much to restore confidence and the possession of the enormous sum which the proceeds brought in enabled the treasury to impound over 100 millions of legal-tender notes. For a time all was well; but Mr. Bryan's success in persuading the Democratic convention to adopt a free-silver plank, combined with the vigorous campaign which he conducted, caused fresh uneasiness. On July 23 the reserve was below 90 millions. This time the banks came promptly to the aid of the treasury, agreeing to turn over some $25,000,000 of gold in return for legal- tenders, and cooperating to supply the export demand with bills.^* By the end of July the reserve had been restored to 111 millions. Again at the end of August it was perilously close to the 100-million mark, but that was the last moment of anxiety. In the end, Mr. Bryan contributed more than any Demo- crat save Mr. Cleveland to the restoration of full confidence in the country's monetary standard. For by forcing the free-coinage issue and getting himself decisively beaten, he brought out the people's verdict in favor of the gold standard. With the harassing doubt about this question set at rest, all difficulty in maintaining the reserve vanished. By the end of 1896 the treasury held 137 millions of gold, and the sum moimted steadily to more than 250 millions in the autumn of 1899. 8. Business Depression in 1894 The importance of this struggle to maintain the gold reserve appears when we follow the varying fortunes of business from 1894 to 1896. Depression in the year following the panic was extreme ; for other factors cooperated with business liquidation and the doubtful outlook regarding the standard to nip in the bud every incipient revival of activity. The so-called Wilson tariff act was pending in Congress and kept business men in uncer- tainty until August, when President Cleveland in disgust allowed it to become law without his signature. Coxey's "army" made its march to Washington in April and May, a sign of hard times both ludicrous and pathetic. Prom April to June over 150,000 bituminous coal miners were on strike, causing a serious shortage of fuel. Another strike tied up the Great Northern railway 28 The Financial Review, 1897, p. 8. MITCHELL: BUSINESS CYCLES 59 for nearly three weeks in April and May. Finally the American Railway Union strike in July caused such disorder that federal troops were ordered to Chicago. Worst of all in its effect upon business was the failure of the corn crop, particularly in Nebraska, Iowa, and Kansas. The wheat crop was fair, but brought low prices, and the cotton crop, while very large, sold at even lower rates. 9. The Brief Revival of 1895 The February contract with the Morgan-Belmont syndicate was followed by a lively revival of business in the spring of 1895. Confidence in the state of the gold reserve enabled financial houses to place several large security issues abroad, and foreigners bought stocks and bonds freely in Wall Street. For a time the stock market was buoyant, commodity prices rose, the iron and steel trade had a surprising "boom," and imports became heavy. But the revival did not last through November; for the syndicate's plan of preventing the export- ation of gold broke down, the gold reserve -grew gradually less, and European anxiety over the Ottoman problem and over the collapse of the speculation in South African gold mines caused foreign selling of American securities. In December President Cleveland's message about the boundary dispute between England and Venezuela brought on an extraordinarily violent stock-market panic attended by heavy failures. 10. The Stringency of 1896 The English war cloud vanished early in 1896, but congressional resolutions threatened hostilities with Spain over Cuba. Such dangers were presently overshadowed by the success of the free-silver party in capturing Democratic state conventions, followed in July by Mr. Bryan's spectacular triumph in the national convention. Until after election day the presidential campaign kept the financial centers in a condition of intense strain. Interest rates were high, loans were hard to negotiate, stocks declined, money was locked up in safe-deposit boxes, and failures for the year were almost as numerous as in 1893. But critical as the situation was, no panic occurred. 11. The Rehirn of Depression The day after election this strain suddenly relaxed. But the great indus- trial and business revival which the Republicans had promised and which their newspapers advertised failed to materialize. The situation improved greatly in contrast with that of July to October, but prosperity deferred its return in a most tantalizing fashion. 60 MEMOIRS OP THE UNIVERSITY OP CALIPORNIA Uncertainty about the new tariff promised by the Republicans, now restored to power, contributed to the dullness of the first half of 1897. It was not until July 24 that the Dingley Bill became law. Meanwhile the South suffered first from floods in the Mississippi Valley, then from an epidemic of yellow fever, and finally from the low price of cotton. In March the decision of the Supreme /Court that the Trans-Missouri Freight Association was illegal threatened to plunge the railways into rate wars. Next month the war between Grreece and Turkey caused another fall of stocks. It was not, in fact, until July that business received a strong impetus. By that time it had become certain that the wheat supply from France, the Danubian provinces, Australia, India, and Argentina would run far below normal. Meanwhile the outlook for the Amer- ican crops improved rapidly. In short, such another year as 1879 or 1891 was promised. Then the long deferred revival of business prosperity began in earnest. IV. Business Prosperity of 1895-99 and the Crisis or 1900 in Europe How European business passed through a crisis in 1890 and suffered depres- sion in 1891-94 has been told. How it revived in 1895, prospered exceedingly in 1898-99, and developed another crisis in 1900 must now be sketched. 1. England It was in the second half of 1895 that the Economist marked the first strong revival of activity in English business after the crisis of 1890. This movement possessed sufi&eient vitality to withstand the depressing effects of bad harvests combined with low prices in the autmnn, and of President Cleveland's message applying the Monroe Doctrine to the British in Venezuela. In 1896 progress continued, still in the face of discouraging events. Exports to the United States fell off, the Rand gold-mining industry was in a state of stagnation following the Jameson raid, and Europe was unsettled by prospects of entan- glement over the eastern question. 1897 brought a more decided improvement in English industry and domestic trade ; but exports declined, primarily because of diminished purchasing power among important customers. India suffered from famine and plague, Australia from drought. South Africa from rinder- pest and depression in the mining districts, Central and South America from poor harvests and political unrest. It was not until 1898 that the improvement in business which had been under way since 1895 gained sufficient impetus to constitute full prosperity. Next year the war with the Transvaal began; but the Economist was able to say in summary: "Seldom has this country enjoyed a year of such all-round industrial activity and prosperity as it did in 1899. ' ' The war was a depressing factor on the whole, but it stimulated powerfully certain trades, particularly MITCHELL: BUSINESS CYCLES 61 iron, coal, and shipping. Foreign trade increased, larger clearings and railway receipts testified to the activity of domestic business, unemployment diminished and wages rose, consumption of staple supplies was larger, and concentration of industrial enterprises was conspicuous. Business activity and government war loans, however, carried rates of interest to so high a point in the autumn that even British municipalities had difficulty in securing loans save on onerous terms. This tide of prosperity reached its highest point in the earlier months of 1900 and then began quietly to recede. High taxation and dear coal — both due to the war — were held largely responsible. Exports declined heavily after June, unemployment increased again, the money market was unsettled, borrowings save by the gov- ernment were small, the public stayed out of the stock market. But the crisis was accompanied by no spectacular failures and no breakdown of credit; it was no more than the fading of the bright prospects of 1899 into the dull out- look of 1901. 2. Germany While English business improved slowly from 1895 to 1897, reached full prosperity in 1898, had a single year of marked buoyancy in 1899, and then gradually relapsed into dullness, German business enjoyed a far more intense phase of prosperity and met with a more dramatic check. N^ot since the first years of the empire, when Germans, intoxicated by their military triumph over Prance, plunged enthusiastically into a campaign for industrial supremacy, had their business hopes been so high and their business pace so fast. The improvement in 1895 was decidedly greater in Germany than in Eng- land. By 1896 almost all branches of industry were reported to be very active, and the investing public was showing a marked predilection for shares in industrial enterprises and credit companies. The reports for 1897 speak of a ''boom" of increasing intensity; 1898 was declared one of the most brilliant years Germany had ever known, and 1899 became known as the annus miraMUs. Perhaps the electro-technical industries made the greatest advances as a whole, but remarkable gains were scored also in mining and metallurgy, and in the chemical trades. Emigration fell to a low point, and immigration from bordering nations became large. The cities increased in population at a rate which would have been rapid even in America, and the Germans showed a marked aptitude in devising new methods of business organization as well as new industrial processes.^" But the second half of 1900 brought a check. High rates of interest and high prices for coal handicapped industrial enterprises. Threatened American competition in iron and steel became a formidable bogey, and prices fell. The 29 The fullest account of this period of German prosperity is given in Vie Storungen im deutschen Wirts- chaftsleben wdhrend der Jahre 1900 If., published by the Verein fur Socialpolitik, Leipzig, 1903, 8 volumes. 62 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA public began to grow suspicious of industrial stocks and turned again to the less lucrative but more conservative government securities, imperial, provincial, and municipal. The punitive expedition to Kiau-chow, a great coal strike, a check to building because of difficulties in borrowing, a sharp fall in stocks which became extreme in June and July, were all unfavorable. Presently, the failure of four large mortgage banks, followed by the arrest and criminal prosecution of certain of their directors, in the closing months of 1900 caused great alarm. Banks of this class had placed over $1,500,000,000 of securities among German investors, and the fear that criminal mismanage- ment like that revealed in the notorious cases overtaken by catastrophe had been common, precipitated a rush to unload. The liquidation was presently intensified by the collapse of two great credit banks in Saxony, the Dresdener Kreditanstalt (capital $5,000,000) and the Leipziger Bank (capital $32,000,- 000). The latter institution, which suspended payments July 25, 1901, had lent $21,000,000 to a single corporation, which turned out to be a barefaced swindle. These disasters made the crisis in Germany far more acute in 1901 than in the preceding year. 3. France French reports indicate that the business expansion from 1895 to 1899 was more moderate than even the English. The revival of activity in 1895 was marred by a speculative mania for gold-mine shares which ended in heavy losses, even before Dr. Jameson made his raid. But commerce and industry were not deeply affected by the troubles of the Paris bourse, and in 1896 con- tinued to gain ground. Even the bad harvests of 1897 did not prevent the volume of business from expanding further, as shown by banking transactions, railway receipts, and foreign commerce. Public interest in industrial secur- ities became marked in 1898, but business was disturbed by the Dreyfus affair, by anxiety over investments in Spain, then at war with the United States, by alternate aljundance and scarcity of capital, and by a decline of exports. But 1899 was a year of relatively great activity in trade and industry, and of buoy- ancy in the security markets. Much importance was attached to the stimu- lating effect upon business of the preparations for the world's exposition to be opened the next year in Paris. And next year the losses of many of the joint-stock companies created to exploit the concessions connected with the exposition was one of the leading features in the reaction. But as the pre- ceding expansion had been mild, so also was the crisis. France, like England, and unlike Germany, passed from business activity to business liquidation with no great wrench. MITCHELL: BUSINESS CYCLES 63 V. Business Prosperity of 1897-1902 and the Crisis of 1903-04 in the United States We have seen that American business was subjected to changes of fortune both remarkably quick and remarkably sharp in 1890-97 ;— crisis in 1890, depression in the first half of 1891, sudden revival in the autumn followed by prosperity in 1892 ; violent panic in 1893, deep depression in 1894, short-lived buoyancy in 1895, return of severe strain in 1896, another relapse into depres- sion after the presidential election, and finally a vigorous revival in midsummer, 1897. To all this the years we have now to review present a marked contrast. For the period of prosperity which began in 1897 ran a long and even course, resisting both the pressure of the European crisis in 1900-01 and the excesses of domestic speculation. Indeed, it Avas not until after some six years of abounding prosperity that general business, as opposed to financial operations, received a serious setback. 1. The Prosperous Years 1897-99 The revival of business ushered in by the profitable harvests of 1897 made rapid progress in 1898. There were two brief pauses, one in the spring just before war broke out with Spain, and one in the autumn, just before the con- gressional elections. But the quick victory in war and the gains by the sound- money party at the polls promptly restored confidence. The last month of the year was also the best ; even the cotton, woolen, and leather industries, which had been in unsatisfactory condition, showed decided improvement. In 1899 there appeared a marked contrast between conditions in the financial markets proper and in general business, mercantile, industrial, railway, agri- cultural, etc. Increasing prosperity marked the latter in almost every branch ; indeed general business had not been so buoyant since the great revival of 1879-81. But a reaction developed upon the stock exchange. One of the most conspicuous features of 1898 had been the resumption of that movement toward consolidation of industrial enterprises which the panic of 1893 had interrupted. The investing public showed a keen appetite for new securities, an appetite which promoters proceeded to gratify by taking options on independent mills and factories at the fancy prices asked by proprietors in flush times, combining them into single corporations capitalized at rates to cover buying prices plus large margins for promoters' profits, and offering the new crop of securities for sale. In 1898 twenty such consolidations were effected with a nominal capital of nearly 709 millions.^" So profitable did these ventures prove to promoters and underwriters that a much larger number were under way or under consideration at the beginning of 1899. But in May the industrial shares 30 L. Conant, Jr., ' ' Industrial Consolidations in the United States, ' ' Publications of the American Statis- tical Association, March, 1901. 64 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA already listed on the stock exchange broke heavily on the sudden death of ex-Governor Flower, who had been a leading figure in the market. Prices recovered slowly from this shock until in September the whole loss had been regained. Thereafter the market was fairly steady for three months, but in December another crash came in "industrials," and on the eighteenth prices dropped far below the lowest point of May. A trust company failed in New York and several financial concerns collapsed in Boston because of the shrink- age in copper stocks. To relieve the panicky condition a money pool was formed to lend 10 millions on the stock exchange. Meanwhile stringency in the money market had become pronounced at several times, the outbreak of the Boer war had caused some uneasiness, and railway stocks had sympathized in a measure with the fluctuations of industrials. Under these circumstances, many intended consolidations were abandoned at the last moment; but never- theless the record for the year went far beyond the high mark of 1898. Not less than 87 such companies were launched, with a capital of 2,244 millions.^^ The most striking feature of the year, however, was that the troubles of the stock market created hardly a ripple of disturbance in general trade. 2. The Pause of Activity in 1900 In Europe we have seen tliat 1900 brought a crisis — moderate in England and Prance, severe in Germany. In the United States this crisis was repre- sented by nothing more than a brief pause in a period of exceptional prosperity. Industrial consolidations, to be sure, were far less numerous than in 1899 — ■ 42 companies with a capitalization of 831 millions. Sales on the stock exchange, also, were a third less for the first nine months. Even commodity prices declined, new orders fell off, the iron and steel trade gave signs of over- production, and from July to October clearings outside New York were less than the year before. But the volume of general business still remained immense ; for the first time our bankers fioated large loans for the central gov- ernments of England, Germany, Sweden, and for many foreign cities ; and our foreign commerce established new high records. This pause in business expansion during the summer was followed by a remarkable outburst of activity after the presidential election in November. Mr. McKinley defeated Mr. Bryan, who ran for a second time on a free-silver platform. So slight had been the reaction and so vigorous was the revival that most statistical indices of the volume of business make 1900 as a whole even a better year than 1899. 31 Conant, as above. MITCHELL: BUSINESS CYCLES 65 3. The Stock-Market Mania of 1901 and the Northern Pacific "Corner" The most notable feature of the post-election period was the outburst of stock speculation. Supported by the prosperity of trade, the large popular majority for sound money, and the establishment of "community of interests" between competing railways, the promoters and underwriters ventured even more daringly than in 1898 and the early part of 1899. After Mr. Morgan had dazzled the public by launching the "billion-dollar steel trust" in February and March, 1901, there seemed for a time no limit to what the public would buy or the prices they would pay. But this frenzy of speculation came to a sudden end on the ninth of May, as the result of a corner in Northern Pacific stock. Two groups of great capitalists, one led by Morgan and Hill, the other by Harriman and the Standard Oil magnates, had been trying to buy a con- trolling interest in the stock of this railway for some time. Their bidding ran up the price to so high a point that brokers "sold short," expecting to profit when the price dropped. But on May 9 it was discovered that more shares had been sold than were in existence, so that the purchasers were in a position to extort any price they chose in settlement of the contracts. This discovery was followed both by wild bidding for Northern Pacific — bidding so wild that its cash price reached $1000 per share — and by sacrifice sales of other secur- ities. The collapse in prices which resulted from the latter was declared by the Financial Review to have been the worst ever known.^^ To save the situation, a syndicate of bankers was formed for making loans on the stock exchange, and the two groups of contestants for the control of Northern Pacific agreed to settle all contracts for the stock at $150 per share. Despite the violence of the panic, no stock-exchange house failed. The market was irregular for some time, but toward the end of May a sustained advance began. For the rest of the year prices were fairly well maintained at a level between the high and the low points of the panic month. The important result was that the public had been badly scared, though not seriously hurt, and remained out of the market. 4. The Prosperity of General Business in 1901-02 This stock-market panic was by no means the only unfavorable feature of the year. Severe droughts cut down the yield of oats and made the corn crop smaller than in any year since the disastrous season of 1894. But the wheat crop was harvested too early to be seriously affected and proved exceptionally abundant. The steel trade suffered from a great strike by the Amalgamated Steel, Iron and Tin Workers against the new United States Steel Corporation. President McKinley was shot September 6 and died on the fourteenth. Stocks suffered a sharp break on the day following his assassination and again on the 32 1902, p. 13. I have followed the account of the "corner" given by A. D. Noyes, Forty Years of Ameri- can Finance, chapter xii. 66 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA day before his death. The attempt of the Amalgamated Copper Company to keep their basic price at 17 cents per pound broke down in December, and was followed by a fall to 13 cents. The cotton-goods trade was not satisfactory and production was curtailed by agreement in the spring. Corn exports were reduced by the short crop, iron and steel exports by the depression in Europe, and copper exports by the depression and by high prices. So strong was the business situation, however, that none of these depressing influences had more than momentary effect. Clearings outside of New York ran ahead of the record of 1900 every month in the year. The railroads proved unable to handle promptly the enormous traffic tendered them, so that an unparalleled car shortage developed in the autumn. This contrast between abounding prosperity in general business and trou- bled financial markets continued through 1902. Again the volume of trade was declared to be greater than ever before, and again the railways were offered more freight than they could move in the autumn. Such lines as the Penn- sylvania, New York Central, Baltimore and Ohio, and Illinois Central sold enormous security issues to provide larger traffic facilities. In June the Steel Corporation and in November the Pennsylvania Railroad made voluntary increases of 10 per cent in wages — an example which was Avidely copied before the close of 1902 or early in 1903. The farmers had most brilliant harvests. Even the high price of meat which followed from the deficient stock of corn and the great anthracite coal strike of May to October did not stem the rising tide. But financial reports betrayed, signs of increasing strain. The public continued to stay out of the stock market, and the number of shares sold in New York was nearly a third less than in 1901, though greater than in 1900 or 1899. Heavy traffic, indeed, helped the prices of railway shares to rise in the summer and autumn when the large harvests became assured. But the more speculative industrials did not recover much of the ground lost in 1901, despite one or two periods of apparent activity under clever manipulation by pools. Meanwhile the money market in the autumn, when the demand for funds to move the crops was at its height, became more stringent than at any time since 1896. Mr. Shaw, the secretary of the treasurj^, adopted extraor- dinary measures of relief — increasing government deposits in the national banks, stimulating larger issues of banknotes by giving the deposits to insti- tutions which agreed to increase their circulation, and finally by accepting other than federal bonds as security for deposits on condition that the bonds released be made the basis of new note issues. But these efforts did not prevent a return of stringency in November and December, a return accompanied by heavy liquidation in the stock market. Railway and industrial shares alike fell in price. MITCHELL: BUSINESS CYCLES 67 5. "The Rich Man's Panic" of 1903-04 The liquidation in stocks which began in November and December, 1902, continued with hardly a check until November and December, 1903. So pro- nounced and so long a decline of security prices had scarcely occurred before. The explanations offered made this liquidation in 1903 the aftermath of the speculation of November, 1900, to May, 1901. When the investing public was suddenly scared out of the market on the ninth of May by the gyrations of Northern Pacific and the crash of other shares, the great banks and capitalists interested in underwriting syndicates had to take over large blocks of industrial securities which they had hoped to unload promptly at a profit. The men concerned were strong enough to defend their holdings in the panic month, and to keep prices fairly level through 1901 and most of 1902. In this effort they were greatly aided by the prevalence of prosperity. But they could not work off the bulk of their holdings, for the investing public resolutely kept out of the market for industrials. This strained situation might have continued even longer had it not been for European intervention. The post-election speculation of 1900, with which the trouble began, had been financed largely with funds borrowed from foreign banks. Favored by the business dullness abroad, the borrowers were able to retain a large part of these loans until towards the end of 1902. Then the Europeans began to recall their funds. To meet such demands American banks had to insist upon repayment of loans by their own borrowers. There remained nothing for the latter but to dispose of their investments. Hence the great outpouring of securities which began in November, 1902, and ran for at least a year. The public felicitously dubbed this liquidation "the rich man's panic." But no panic in our technical sense occurred. A few of the new industrial corporations failed outright, the United States Shipbuilding Company was stillborn, and a number of financial houses became bankrupt. Even the best railways and municipalities found it difficult to borrow on their accustomed terms, and had to raise the rate of interest on their bonds, or resort to the issue of short-time notes. Still, the niunber of disasters was small in view of the severity of the decline on the stock exchange, apparently because the losses fell largely upon men of great wealth. In 1903 the reaction in the financial markets at last began to be felt outside. Difficulties in borrowing on the part of the railways reacted upon the demand for goods, particularly for iron and steel. In this industry the second half of 1903 accordingly brought a period of depression and restricted production. Manufacturers in many other branches complained of smaller orders, of increased expenses, of extortionate demands by trade-unions, etc. The rail- ways very generally reported gains in net earnings which were small in com- parison with the gains in gross earnings, and accounted for the difference by 68 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA pointing to the higher cost of everything they bought. The cotton trade suffered especially from the high price of the raw material, in which a gigantic speculation was carried on under the leadership of Daniel J. Sully. But the farmers had a satisfactory year; for, while crops were smaller than in 1902, they brought higher prices. And clearings outside of New York showed mod- erate gains in every month save May and July. The slight and doubtful gains of general business in 1903 turned into mod- erate losses in the first seven or eight months of 1904. Clearings both in New York and outside ran behind the corresponding records of the year before from January to July — with negligable exceptions — and the gain of August was trifling. Substantially the same testimony is borne by railway receipts, by the accumulation of idle money in the banks, by very low rates of interest, by the arrest of the advance in wages, and the defeat of the men in most of the labor contests. Extremely severe weather from January to May, hampering trafl&c and threatening the early crops, the conflagration in Baltimore resulting in losses put at 100 millions, and the fears excited by the war in the Orient, were secondary factors, reinforcing the brake upon business activity. On the other hand, the investing public developed an insatiable appetite for high-class bonds, so that both corporations and municipalities were able to satisfy their capital requirements, and provide funds for new developments. In the stock market the lowest points were touched in March. Contrary to expectations, the success of the government in the Northern Securities case in that month was followed by a rise in prices, which ran on slowly until July and then quickened its pace. Judge Parker's action as candidate for the presidency in committing the Democratic party to an explicit acceptance of the gold standard prevented the autumn campaign from exercising the disturbing influence noted in 1896 and 1900. Finally, towards autumn the assurance of abundant harvests, save of wheat, encouraged the business public. Amid these favoring circumstances, the reaction was terminated in a remarkably brief time. The rate of progress in general business had not slackened notably until 1903, the actual losses were confined mainly to the months of Januarj^ to July or August, 1904, and a vigorous revival began in September. 6. "The American Invasion of Europe" The points of similarity and contrast between the course of business condi- tions in America and Europe during the years 1897 to 1904 may be brought out in developing a topic concerning which little has been said — the growth of foreign commerce. The official record, which made a deep impression on men's minds both here and abroad, is summarized in the following figures. Fiscal years are taken, because they happen to correspond more closely than calendar years with the changes in business conditions. MITCHELL: BUSINESS CYCLES 69 Merchandise Exports and Imports of the United States in Millions op Dollars Excess of Exports Imports exports July 1, 1896, to June 30, 1897 1,051 765 286 July 1, 1897, to June 30, 1898 1,231 616 615 July 1, 1898, to June 30, 1899 1,227 697 530 July 1, 1899, to June 30, 1900 1,394 850 544 July 1, 1900, to June 30, 1901 1,488 823 665 July 1, 1901, to June 30, 1902 1,382 903 478 July 1, 1902, to June 30, 1903 1,420 1,026 394 July 1, 1903, to June 30, 1904 1,461 991 470 To understand the pride which these figures aroused in America and the alarm they excited in Europe it is but necessary to note how far they surpassed all previous records. Never but once before had American exports exceeded a billion dollars, and that record (1,030 millions) had been made by the extra- ordinary harvest conditions of 1891. The previous high record for excess of exports over imports— 265 millions — had been made as long ago as 1878-79. The average excess of exports for the decade July 1, 1886, to June 30, 1896, had been 70 millions. Current opinion in the United States hailed the extraordinary gain of exports and the still more extraordinary balance in our favor as a sign that this country was conquering the markets of the world. It was prophesied that after paying off all its own debts the United States would presently become the leading "creditor nation" of the world, and that New York would displace London as the foremost center of finance. Abroad, Mr. Chamberlain's pro- tectionist propaganda was supported by pointing to Britain's danger from American competition in neutral markets, and an Austrian minister of finance suggested a European tariff alliance against the United States. So lively was popular interest in the subject that the illustrated magazines took up the "romance" of commercial expansion. In 1900 McClure's published a series of articles by Mr. R. S. Baker entitled "Our New Prosperity," and in 1902 S crib tier's brought out Mr. P. A. Vanderlint's "American Invasion of Europe." But in 1901 it began to appear that the patriotic boasts had been premature. Competent critics demonstrated that the treasury's figures for the balance of trade did not show the balance of payments. Not only was there reason to believe that the customs-house values of many imports were too low, and of certain exports too high; but it was also necessary to take account of other items than the commerce in merchandise, — such as the expenditures of Amer- icans traveling abroad, the freight paid to foreign shipping companies, the foreign remittances of immigrants, the interest and dividends on investments by foreigners, the foreign profits made by buying our securities in times of depression and selling them back at higher levels, etc.'' Again, as prosperity 33 See N T Bacon "American International Indebtedness," Yale Review, November, 1900; Final Report of the Industrial Commission, 1902, pp. 34-41; H. Dietzel, "Die 'enorme Ueberbilanz' der Vereinigten Staaten," Jahrbiicher fiir Nationalohonomie, August and November, 1905. 70 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA ■grew in the United States imports rose rapidly, and thus cut down the credit balance. On the other hand, when the European "boom" of 1897 to 1899 passed through the crisis of 1900 into the depression of 1901 to 1904, our exports fell off. For the relaxation of domestic demands for their products allowed foreign producers to compete more vigorously for the trade of neutral markets. Not only could they quote lower prices than at the height of their own "boom," but they could also promise quicker deliveries. In the world of finance, American subscriptions to European loans, of which so much was made in 1900, fell to much lower figures in later years, and the credit balance in favor of our bankers, put at $200,000,000 at the close of 1900, was presently exhausted and replaced by a debit balance of similar dimensions. To finance the great industrial con- solidations of 1901 and the heavy trade of 1902, American bankers had been obliged to negotiate finance bills on an enormous scale in London, Paris, and Berlin. Finally, the stock liquidation of November, 1902, to November, 1903, forced by the demand for repayment of foreign loans, proved that the American money market had not yet emancipated itself from European domination. VI. Business Depression in Europe, 1901-04 The annals of European business were dropped on the outbreak of the crisis in 1900 in order to sketch the long period of American prosperity which led up to the "rich man's panic" of 1903-04. What is next to be recounted is the gradual ebbing of the business tide in England, G-ermany, and France after the crisis of 1900 had passed. 1. England The ebb in English business which began after the middle of 1900 continued through 1901. Wholesale prices, wages, and stocks all fell; unemployment increased; railway earnings and provincial clearings both indicated a decline in trade ; foreign commerce was slightly smaller in money value, though slightl}^ greater in physical volume. The depression, however, was moderate, and the Economist thought the volume of business above the average, though less than in 1899. The Boer War ended in 1902, but the hoped-for revival of business did not come. Foreign trade was a trifle larger both in volume and in value, stimii- lated by American prosperity and retarded by German depression. Domestic trade made some progress, but less than foreign trade. Prices and wages sagged a little further, and unemployment increased. The public was apathetic with reference to stock speculation and even investment; nevertheless stock prices advanced a trifle. The farmers fared better than in 1901. On the whole, the year was characterized as neither good nor bad. MITCHELL: BUSINESS CYCLES 71 Again in 1903 disappointment was felt. The year, though "not downright bad," was poorer than 1902. Disturbances in Macedonia and the prospect of war between Russia and Japan interfered with foreign commerce, which never- theless registered slight gains. The great cotton industry was disturbed by the wild fluctuations in the price of the raw material— fluctuations for which American speculators were blamed. The farmers fared miserably from a wet harvest. Wage-earners suffered from less pay and less employment. Domestic trade also fell off, particularly in the last six months. The Economist believed Mr. Chamberlain's protectionist propaganda to be a disturbing factor. In financial centers there appeared to be very little capital for investment; the stock exchange was dull and prices fell. This financial and industrial depression still weighed upon the country throughout the greater part of 1904. Foreign trade continued to gain slowly, and proved the mainstay of the manufacturing industries. Domestic trade, on the contrary, was further restricted. Wage-earners once more found their condition grow worse from a slight decline in wages and a larger decrease in employment. The farmers, however, had an average year — decidedly better than 1903. And the stock exchange, perhaps the most sensitive barometer of the business world, gave signs of revival, though in a hesitajiog^fashion. By the close of the year there came no marked activity, bu^^^Go^ B^^JSl feeling, which 1905 abundantly justified. 2. Germany During these years Grerman business pursued a sui ^Iffl^ JAJSH ^^a ve that the depression was more severe, and that the revival began somewhat sooner. With its bank failures, disclosures of fraud, low wages, short hours, unem- ployment, mediocre harvests, internal dissentions within syndicates, struggles between producers of raw materials and manufacturers over prices, pessimism among investors, and crisis on the bourse, 1901 was a bad year indeed. Although 1902 brought no fresh disasters, it brought little alleviation from hard times. The harvests were far from good. But the distrust caused by the great bank failures gradually lessened as the months passed, and investors began to buy government securities with freedom. Next year the strain was held to have ended and a slight improvement to have begun. The coal, iron, electrical, and shipbuilding industries fared better ; farmers had satisfactory crops, both imports and exports increased, unemploy- ment diminished, and in general there seemed ground to hope for genuine prosperity in 1904. How far this hope had been realized was a matter on which opinion still differed at the end of the next year. The bourse had a bad panic on February 8 and 9 when news of the war between Japan and Russia surprised the German 72 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA market. Semi-official reports had established the expectation in Berlin that no rupture would occur and the "bulls" were caught in the midst of a campaign for the rise. However, aid was lent by the great banks, and despite heavy failures general business was not seriously shaken. The year was marked by numerous combinations of capital, comparable in extent with those of 1898- 1901 in America. In industry, electrical and textile establishments did better than in 1903; coal, iron and steel enterprises not so well. The farmers had excellent crops of cereals, but poor crops of fodder and potatoes. All in all, the statistical record indicated a gain over 1903, but one limited in extent. 3, France As often before, so in 1900, Prance felt the depressing effects of the crisis less than her neighbors. The liquidation continued through 1901, which was marked by slack business and a fall in industrial shares. Moreover, the staple crops, excepting rye, were less than the year before. The one sign of lively business was a "boom" in gold mining shares in December, based upon reports that operations would be resumed shortly in South Africa. No resumption of activity came in 1902; on the contrary, industrial and commercial operations were further restricted in many lines. The speculation in gold mines came to grief because everyone tried to sell at a profit when peace was signed. But the farmers, except those producing wine grapes and sugar beets, had a better season. A slight improvement in conditions led the commentators to say that the depression had come to an end in 1903. And in 1904 they declared that the upward trend had continued, though buoyancy was far from being attained. The most striking feature of this year was the calmness with which the French investors, who held many millions of Russian bonds, viewed the Japanese vic- tories. On February 8 news that war had begun caused a sharp break on the bourse, and on the twentieth there was a serious decline, in which other stocks suffered more than the "Russians." But the great banks in conference with the minister of finance came to the aid of the market, and a prompt recovery was effected. In later months there were several periods of advancing prices, and in the intervals between them what gains had been made were firmly held. Thus, as in England, the stock market of 1904 heralded the better times of 1905. VII. The Prosperous Times or 1905-06 in Europe and America The forward movement, which began upon the great stock exchanges in the latter part of 1904, developed into a world-wide march of prosperity in 1905 and 1906, and ended in the world-wide crisis of 1907. Between the four coun- tries whose business history we have been following the differences to be noted in these years are differences only of degree. MITCHELL: BUSINESS CYCLES 73 1. England In England the impetus to business prosperity seemed to come from abroad. In 1905 the export demand for British goods was nearly 10 per cent larger than in 1904, and the consequent activity of the export trades reacted upon domestic business. By the end of the year industrial prosperity had become general. Similar conditions prevailed in 1906. Exports gained nearly 14 per cent over the large totals of 1905, and all departments of foreign trade made new high records. For the first time the trade totals ran beyond a billion pounds sterling. Good crops among the most important customers for British goods, and the heavy domestic demands upon American and German manufacturers which lessened their competition in neutral markets, were among the most important causes of the immense exports. Domestic trade expanded under these conditions, though in less measure. On the stock exchange alone 1906 was disappointing. The aggregate prices of 325 representative securities actually fell in this year — "one of the most active and prosperous" that England "ever experienced."" In explanation of this anomaly, the Economist pointed out that the interest rates allowed by bankers on deposits had risen above the rates on the best securities, and that business men would continue to put their large profits back into their own enterprises so long as the "boom" lasted. The high interest rates became more marked as the year progressed, until finally in October the Bank of England raised its discount charge to 6 per cent, a rate seldom attained except when a crisis is feared. Such an extraordinary charge for discounts, in the midst of prosperity, was taken to be a measure of defense against the enormous with- drawals of gold by Americans. To support a great stock-market campaign in Wall Street during the season when the demand for money to move the crops was at its highest point, American capitalists had negotiated immense sums of finance bills in London and employed the proceeds for importing gold. Suc- cessive advances of the bank rate from 3l^ to 5 per cent having failed to check this process, the Bank adopted the decisive measure of a 6 per cent rate. Within a week the withdrawals of gold for New York ceased ; but the money market continued so stringent to the close of the year that a 7 per cent rate was feared. To prevent such a disturbing measure the Bank of France went to the aid of London, by discounting a large amount of English bills. 2. Germany German business differed from English in 1905 and 1906 chiefly in that the impetus to prosperity came from domestic sources, and that the "boom" was more intense. The trade revival made such rapid progress in 1905 that the 34 This index number of stocks is kept by the BanK:ers' Magazine of London The aggregate values are given for December is' 1905 and 1906, as fsfoTS.OOO.OOO and £3,021,000,000-a fall of 1.95 per cent. 74 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA second semester suggested comparison with the wonderful times of 1898 and 1899. The enormous demands for capital caused a rapid rise of interest rates, so that the year ended with 6 per cent as the official minimum of the Reichsbank. In 1906 the volume of business increased still further ; prices rose ; employers complained of a scarcity of labor, of coal, of raw materials, and of capital. But amidst this intense activity of trade and industry, the stock exchange was dull in Germany as in England. The highest level of security prices had been touched in 1905. The public deserted such conservative issues as the govern- ment 3 per cents, in favor of industrial stocks. But even in the case of the latter, prices sagged. "Dear money" was the current explanation. The volume of business had outgrown the capital resources of the country, so that loans, whether on short or long time, were difficult to secure at all, and impossible to secure except on onerous terms.' High as the Bank of England rates were in 1906, the ReichslDank rates were higher still — 6 per cent on January 1, presently reduced to 5 per cent, and in May to 4iA, but advanced again to 5 per cent in September, 6 per cent in October, and 7 per cent in December. 3. France In France, also, 1905 and 1906 were years of expanding trade at home and abroad, and of widely diffused prosperity. But with their customary prudence in business matters, the French advanced less rapidly than the Grermans or the English. Moreover, the internal difficulties which the Russian government had to face after its military defeat, and the Morocco affair, were more serious dangers to French than to other investors. This prudence had its reward even in 1906. While London was facing a 6 per cent and Berlin a 7 per cent bank rate, Paris kept 3 per cent throughout the year, and the Bank of France was able to help the British market as well as to serve its own. Even the open-market rates in Paris advanced but slightly over the average for 1905, and remained far lower than the corresponding rates in London and Berlin. Hence the Paris bourse did not have to carry the incubus of "dear money." The reports speak of great activity even in the usually dull season of summer. A large number of new industrial securities, many foreign, were offered to French investors and bought with enthusiasm. Securities with fixed yield, however, declined in price. 4. The United States Finally, the business history of America in 1905 and 1906 is much like that of Germany. The volume of both domestic and foreign trade and of industrial production expanded month after month, prices and wages rose rapidly, the railways were taxed beyond their capacity by the freight tendered, and the farmers were favored with abundant crops. On the whole, business prosperity MITCHELL: BUSINESS CYCLES 75 seemed even more general and more intense than in 1899 or 1901. Not even such a disaster as the San Francisco fire caused more than a momentary pause in the activity. But, as in England and Germany, this expansion of business overtaxed the resources of the money market. Periods of increasingly severe stringency recurred at ever briefer intervals, particularly in the autumn when the crops were being harvested and sent to market. Resort was had to foreign borrow- ings upon finance bills on a grand scale ; but, even so, interest rates kept rising, and both commercial paper and bonds grew harder and harder to sell. For a time it seemed as if "dear money" could not repress the buoyancy of the stock market. The upward rush of stocks which began in 1904 went on unchecked until March, 1905. A slight decline in April was followed in May by a decided break in prices. But next month a new speculation for the rise began, which was carried on with few checks to a culmination in January, 1906 — and that in the face of call-loan rates which averaged over 9 per cent from October to January. The stock-exchange record of 1906 was far less brilliant — again as- in Eng- land and Grermany. The general course was downward from the culmination in January to a much lower level in May. In June and July the market seemed to hesitate; but in August announcements of increased dividends on the Har- riman railways, and the resumption of dividends on the common stock of the United States Steel Corporation led to another great outburst of speculation and an upward rush of prices. For the rest of the year the market wavered around the high level established in August, never getting quite back to the January climax and gradually weakening toward the end of the year. VIII. The Crisis of 1907 The international crisis which terminated this period of business expansion came in 1907. The American panic of October and November was but its most violent manifestation. 1. England English statistical indices of the volume of business in 1907 almost all show increases above the high records of 1906. But in the former year the tide was rising; in 1907 it was receding. The upward movement of prices culminated as early as May, and after midsummer trade activity began to slacken. How- ever, the large amount of orders already on hand kept production on a high level until the close of the year. The high rates of interest, which continued from 1906 both in England and elsewhere, handicapped business by discour- aging the attempt to raise new capital. On the stock exchange both speculators and professional dealers suffered heavy losses. During the first semester the 76 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA activity of general business left but a small surplus of funds for investment and speculation ; during the second semester discouragement was felt over the curtailed business expansion. The English crisis, however, bade fair to be as quiet and uneventful as the crisis of 1900. But the collapse of credit in America in October and November led to an enormous outflow of gold, threat- ened British investors with heavy losses, and compelled the Bank of England to advance its rate to 7 per cent. Elastic as the financial organization of Eng- land is, the strain of this foreign panic was severely felt, and business fell off at a more rapid rate.^* 2. Germany Germany, also, had clearly passed the climax of her "boom" some months before the American panic occurred. Prices had turned downward, the pecu- liarly sensitive iron and steel markets had begun to weaken, industries which depended upon current borrowings — like the building trades, and shipbuilding — were less active, the labor market showed an increase in the number of men seeking jobs as early as July, investors were apparently losing confidence in industrial shares, interest rates continued to rise, the course of quotations on the bourse was downward, and complaints multiplied about the high cost of living, the heavy expenses of doing business, and the decline of net profits. But the recession of activity which had l)egun was very gradual until October. Then the bad news from New York greatly intensified the stringency of money, and led the Reichsbank to raise its rate to 1^2 psr cent. At once the slow decline of activity became rapid. One bank failed, two conspicuous specu- lators went bankrupt, and credit received a severe shock. But cooperation among the great financial institutions tided over the difiicult months, and Ger- many had no panic. 3. France France once again came off with little loss. The Bank did not raise its discount rate above 4 per cent, and was able to render liberal assistance to the money market of London and hence indirectly to all money markets. Even on the bourse the American panic was but slightly felt; only a few of the securities fell in price, and these few were mainly American railways. Gen- eral business was not seriously hampered by dear money, manufactures main- tained the course of moderate prosperity which had characterized 1905 and 1906, and railways had a considerable increase of trafiic. Never, in short, was the strong side of French conservatism more conspicuous by contrast with the weak side of American and German enterprise than in 1907. S't A fuller account of this crisis is given below in chapter xii. MITCPIELL: BUSINESS CYCLES 77 4. The United States The course of events in the United States was in general like that in Eng- land and Germany, save that our credit and banking system broke down under the strain. The crisis— that is, the recession of business activity — antedated the panic by several months. It is true that the volume of general business and the rate of industrial production gave few signs of waning before the bank failures of November. But prices of raw materials had begun to recede in the spring or early summer, new orders were lighter in the iron and steel trades, the copper market was oppressed by the accumulation of unsold stocks, and three large industrial enterprises — Milliken Brothers, a steel firm, the Pope Manufacturing Company, makers of automobiles, etc., and several of the West- inghouse companies, manufacturers of electrical equipment — were forced into the hands of receivers in June, August and October. Meanwhile the investment market for loans was becoming more and more stringent. Even the strongest railways were giving up the effort to sell long-time bonds, and substituting two- or three-year notes to meet their most pressing capital requirements. New York City, after three unsuccessful attempts to float 4 per cent bonds, finally yielded to necessity and on August 26th offered $40,000,000 at 4i/^ per cent. On the stock exchange the difficulty of maintaining the level of quotations which characterized the later months of 1906 became an impossibility in 1907. A rapid fall in January and February developed in March into a crash of prices, in which all the gains of the post-election "boom" of 1904 and the "bull" campaigns of 1905 and 1906 were lost. April brought a partial recovery ; but in May and June prices sagged again. Another upward turn in July was fol- lowed by a second crash in August, when the low prices of March were eclipsed. Early in September the market showed a little strength, but presently prices began to decline once more, and the bank embarrassments which started the panic in October came on a falling market. Acute trouble began with the suspicion which fell upon certain New York banks, controlled by a group of financiers who were believed to have suffered heavy losses through the decline in the prices of copper stocks. To forestall a general loss of confidence, the clearing house examined the affairs of those among the threatened institutions which belonged to the association, and agreed to give them such assistance as they might need. The publication of this news in the morning papers of October 21 did much to allay distrust. A panic might have been averted had not the clearing agent of one of the largest trust com- panies in the city announced late on the same day that after October 22 it would refuse to be responsible for checks against this client. Next morning the trust company opened its doors to a run and after paying out $8,000,000 to clamorous depositors suspended payments. 78 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA The panic which followed exhibited all the usual phenomena: runs upon banks and trust companies, hoarding of money, a premium upon currency, restriction of payments by the banks, call-loan rates above 100 per cent, unsal- ability of commercial paper, a severe decline of prices on the stock exchange, heavy bankruptcies, the interruption of general business from inability to get money for pay-rolls, difficulty in making collections, and demoralization of the domestic exchanges. Prom New York as a center these conditions spread rapidly over the whole country. By way of remedy, money pools for lending on the stock exchange were formed ; clearing-house loan certificates were issued both for settlement of bank balances and for general circulation ; legal holidays were declared by the governors of Nevada, Oregon, and California; national banks increased their note issues as rapidly as possible; the secretary of the treasury enlarged the government deposits in banks by some $35,000,000 and offered new government securities for sale ; and over $100,000,000 of gold was imported from Europe in November and December. By the end of the year the panic was under control and business passed into the phase of depression.^^ IX. The Depeession of 1908-09 and the Revival of 1909-11 in England and Germany The crises of 1890 and 1900 had both been f oUoAved by about four, years of depression in all three of our European countries. But not more than a year or a year and a half of dullness followed the cassis of 1907. In reviving again business was repeating its history; in reviving so quickly it was repeating its history with a difference. A further difference presently appeared. In 1910, for the first time in twenty years, business cycles took opposite directions in different European countries. Conservative France went oif with enterprising America upon the path of decline, leaving England and Germany together upon the highAvay of prosperity. The closing years of our period are therefore not without points of novelty. 1. England We have seen that signs of an approaching crisis appeared in England early in the summer of 1907. The outbreak of panic in America aggravated the difficulties arising from local conditions by causing an extreme advance in discount rates. Although no panic occurred in England, business received a severe check. As the orders already booked by merchants and manufacturers were filled, the activity of trade began to slacken. Soon after the beginning of 1908 this decline in the volume of business became rapid. Export trade suffered not only from depression in America, but also from a falling off of oriental demand. Heavy bankruptcies which 35 A fuller account of this panic is given in chapter xii, below. MITCHELL: BUSINESS CYCLES 79 had occurred among Chinese and Japanese merchants affected the market for cotton goods. Harvest failure and commercial depression in India crippled England's most important customer. Under these unfavorable conditions the aggregate value of exports fell over 11 per cent behind the record of 1907. That domestic business likewise suffered was shown by a decline in railway receipts and in the profits of joint-stock companies, by a decrease in employ- ment, reductions of wages, and numerous bankruptcies. Probably the farmers fared best. While the crops did not quite equal those of 1907, still they were well above the ten-year averages. As usual in times of depression, money became cheap and abundant. Prom the crisis figure of 7 per cent, the bank rate was gradually reduced to 2y2 per cent by the twenty-eighth of May, at which figure it remained for the rest of the year. Corporations, both domestic and foreign, hastened to avail them- selves of these low rates. Many loan applications which had been deferred because of the unfavorable market for bonds in 1906-07 were now brought for- ward, and other companies which had sold one- or two-year notes to meet their most pressing requirements now sought to fund these floating debts. Conse- quently, while general business was declining in volume, the volume of invest- ment business broke all records. Just how long this depression lasted it is difficult to say. Unemployment was greatest in October, 1908 ; wholesale prices were lowest in Pebruary, 1909 f^ the import trade did not begin to recover until April and the export trade not until June, 1909 ; wages did not show an increase until the last quarter of the year. But it is certain that a turn for the better occurred late in 1908 or early in 1909. While the first months of the latter year found industry still inactive, the later months brought a vigorous revival. In few departments of business were the high records of 1907 equalled, the Lancashire cotton trade was slow in recovering from the slump in Indian purchases, and the high cost of living caused bitter complaint ; but by the close of the year prosperity was fairly re-established. Railway receipts, corporation profits, security prices, clearings, and interest rates were all higher. The farmers were troubled by wet weather in harvest, but had a fairly successful year. The number of business failures was the lowest for a decade. But, owing both to the higher rates of interest and to the satisfaction of deferred demands for capital, the volume of recorded investments was somewhat smaller than in 1908. The revival of 1909 made rapid progress in 1910. Indeed, England was distinctly the most prosperous among the great nations of the world in this year. Her imports, exports, re-exports, bank clearings, and capital invest- ments all surpassed the previous high records. Business failures were even fewer than in 1909, unemployment shrank again, wages increased, and wholesale prices continued to rise. The farmers did not share fully in the general pros- 36 Sauerbeck. 80 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA perity; but despite another wet season did fairly well. A ''boom" in rubber and oil stocks attested the buoyant optimism of investors. Even the occurrence of two general elections in a single year could not check the rising tide. And the year closed with bright prospects of a further increase in the volume of trade during 1911. This promise was measurably fulfilled. The woolen, shipbuilding, iron, steel, shoe, and cotton trades were highly prosperous; exports increased 5.6 per cent ; railway receipts were larger ; the percentage of unemployed members among trade-unions was less than in any year since 1900 ; wages were materially increased ; the farmers had a profitable season, for though yields were reduced by drought the quality of the crops was excellent and prices were high. But several untoward developments marred the record. Building was not active; the tin-plate trade suffered a decline of orders from America; all the trades using sugar as an important raw material were injured by its high cost; the coal trade was kept in uncertainty by the prospect of labor troubles ; the rail- ways had a great strike to contend with ; the high cost of living augmented the unrest among wage-earners in many other trades; and financial affairs were disturbed by a fear of war with Germany. One savings institution assigned, and a second had to be taken over by a group of banks. The applications for fresh capital, while large, were less than in 1910. The stock exchange was dull in the second half-year, and the prices of securities sagged. As a conse- quence town clearings fell off, while country clearings, both in London and in the provinces, increased. The Economist's table of the profits of upwards of two hundred industrial companies showed an average gain of 8.6 per cent over 1909-10 ; but the gains were slight in the last three months, suggesting that the boom was passing. 2. Germany The course of business in Germany from 1907 to 1911 differed only in degree from that in England. A panic was avoided in 1907, but 1908 brought a severe depression. The cartels, which have recently come to play so large a role in Germany, endeav- ored to meet the situation by preventing the cutting of prices. In this policy they achieved measurable success, but at the expense of a severe restriction in production, and much friction with their customers. A few of the weaker cartels broke up under the strain, and the process of forming new organizations of this type was temporarily checked. Meanwhile foreign commerce fell off, unemployment increased, and the urban demand for consumers' goods shrank. The farmers, however, had good harvests, and their enlarged purchases made up in a measure for the slack demand from other quarters. A revival of activity came in 1909, but it seems to have begun a few months later than in England. The stock market developed animation in the second MITCHELL: BUSINESS CYCLES 81 third of the year, but it was not until after midsummer that a change for the better was distinctly marked. Excellent harvests, combined with high prices for farm products, supported the movement. Heavy applications for long- time loans showed that the industrial companies anticipated an increase of orders and wished to extend their facilities. That the investing public had confidence was shown by the readiness with which it turned from investments in bonds bearing a fixed interest to investments in stocks bearing variable dividends. The good promises of 1909 were amply fulfilled by 1910. Prosperity extended steadily in almost all branches of trade. Both the foreign and the domestic demand for German products increased, and unemployment dimin- ished. Interest rates rose again, and the volume of new security issues declined somewhat. But, satisfactory as the year was for Glerman business, it did not attain the pitch of activity prevailing in England. Poor harvests caused by drought diminished the further expansion of trade in 1911. The prices of food rose to an extraordinary level, while the prices of raw mineral products were moderate. Nevertheless, the coal, iron and steel trades were extremely active. Railroad receipts, unemployment returns, and statistics of exports and imports all testified that the volume of business was greater than in 1910. As in England, however, the financial markets had a different story to tell. The threat of war with England and Prance caused the recall of French funds invested in German bills, also the withdrawal of large smns from the banks by local depositors. Prices fell heavily on the stock exchange, new security issues were checked, interest rates were uncertain and high. The banks were able to borrow heavUy from N'ew York, however, and the tension relaxed when the warcloud blew over. On the whole the year was one of marked prosperity ; but not prosperity of such intensity as that of 1899 or 1906." X. The Depeession of 1908, the Revival op 1909, and the Reaction of 1910-11 IN Feanoe and the United States 1. France France did not remain immune from the depression of 1908, but she was affected less than England or Germany. Industrial activity declined some- what in comparison with 1907, but was not much below what the French com- mentators considered normal. Business men set their affairs in order with little difiaculty, and by the end of the year were ready for a revival of activity when the first favorable impetus should come. 37 For business conditions in Germany in 1910 and 1911 I have reUed upon L. Pohle's reviews published in the February numbers of the Zeitsohrift fur Sooialwissensehaft, 1911 and 1912. 82 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA As in the case of lier neighbors, so in that of France, a distinct revival began in 1909. Both in domestic industry and trade and in foreign commerce there was greater activity. The shares of industrial companies and of banks, as well as government securities, rose in price. Aside from wine-growers, the farmers fared well. The great coal, iron, and steel producers had a busy season, and the year ended with prospects of greater prosperity in 1910. Unfortunately, these promises were not fulfilled in France, as they were in England and in Germany. Extraordinary floods interfered with spring planting and heavy rains interfered with harvests. Both the wine and the grain growers had a wretched season. In a country where agriculture is so important in comparison with manufacturing, serious loss to the farmers means a poor year for general business. Extensive strikes added to the trouble. Increase in foreign commerce and activity in financial circles were slight compensations for agricultural depression. Hence the parallelism between the course of business in England, Germany, and France was notably broken in 1910. While the former countries enjoyed heightened prosperity, France relapsed into depression. In 1911 the harvests once more suffered, this time from drought; but the shortage was not so great as in 1910. Industry and commerce appear to have rallied from depression, but they did not attain high prosperity. The strained relations with Germany arising from the Moroccan situation caused heavy withdrawals from the banks, and compelled the latter to restrict their advances to merchants, manufacturers, and dealers in securities. At one time the strange spectacle was presented of New York lending money to Paris on a large scale. Importations were increased beyond all precedent ; but the huge total resulted less from prosperity than from the short crops harvested in 1910. Riots ascribed to the high cost of living caused much sensation. On the whole, the year was one of unrest and uncertainty, but not one of serious depression. 2. The United States In America the panic of 1907 was followed by what the Financial Review declared to be the worst industrial paralysis in the country's history.^^ During the first half of 1908 the production of pig-iron was barely more than 50 per cent of the production in the first half of 1907. Other trades making pro- ducers' goods suffered almost as severely. Of course, the total volume of trade did not shrink in so extreme a degree, because purchases of food, clothing, and the like cannot be stopped or postponed like the purchase of pig-iron. But from January to August railway gross earnings showed losses of from 12 to 20 per cent each month, and clearings outside New York losses of from 12 to 17 per cent in comparison with the corresponding months of the preceding year. 38 The Financial 'Review, 1909, p. 11. MITCHELL: BUSINESS CYCLES 83 Unemployment assumed extraordinary proportions in the industrial centers, and emigration ran far beyond immigration. In sharp contrast with this industrial and commercial depression was the buoyancy which presently developed in the financial markets. After February the prices of stocks began to rise and this movement continued without a serious check to the end of the year. By January, 1909, the railway shares had regained all the losses of the panic year, standing substantially where they had stood in January, 1907. No doubt this movement was greatly facilitated by the exceedingly low rates for money which came within two or three months after the close of the panic. With call loans to be had for less than 2 per cent, it was profitable to borrow money and buy securities which yielded interest or dividends of 4 per cent or over.'*'' But the heavy purchases of stocks and bonds were also proof of reviving confidence ; for men will not risk the purchase of securities with borrowed funds for the sake of a small margin of gain in interest, unless they think that the securities are more likely to rise than to fall on their hands. In the autumn the hopeful tone began to extend from financial to commercial and industrial circles. Despite the slow rate of consumption, stocks of goods on the shelves of merchants and in the yards and warehouses of manufacturers had run so low that increased purchases became necessary. The second half of the year, accordingly, and still more the last quarter, brought a distinct increase in the volume of production and of general business. Good crops and high prices for agricultural products provided a firm foundation for the incipient revival. During the winter and spring months of 1909 business was conducted in a rather cautious manner. The steel trade was disturbed in February by wild cutting of prices. Throughout 1908 the United States Steel Corporation had held stubbornly to the policy of maintaining the selling prices of its products. But, concluding that its competitors were secretly selling at reduced rates, the corporation finally changed its policy and announced that it would "protect its customers." The active canvass for orders which followed soon bore fruit and in the second half of 1909 the output of pig-iron broke all records. Mean- while such indices of the volume of general business as railway gross receipts and clearings outside of New York showed steady gains and in the latter part of the year ran ahead not only of the figures for 1908 but also of the higher figures for 1907. Seemingly the improvement in business conditions began at least as early in America as in Europe and proceeded at a more rapid pace. It is certain at least that wholesale prices rose more rapidly during 1909 in the United States than in England, France, or Germany.'" And once again 30 See the monthly statistics of security prices and interest rates in chapter iv, section iv, below. « See the table of relative prices of identical commodities in the United States and England, the United States and France, and the United States and Germany, in chapter iv, section i. 84 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA good crops (except of cotton), selling at high prices, added their powerful influence to the factors which made for prosperity. We have seen that the revival of 1909 made rapid progress in both England and Germany during 1910, and that it was checked in Prance by an extremely bad season for the farmers. For once the course of affairs in the United States resembled that in France more closely than that in the other two countries. But the recession of activity in America was not due to agricultural disasters. On the contrary, the American crops were bounteous, with the exceptions of spring wheat and cotton, and, though prices were lower than in 1909, the farmers as a whole had a profitable season. As is often the ease, the first signs of the coming reaction were given by the stock exchange. The rise of transportation shares which had begun in March, 1908, ran on through 1909 with no serious check, and by December eclipsed even the highest record of 1906. Early in 1910 a reverse movement set in, which soon developed into a severe fall of prices. June brought the lowest quotations for a majority of the stocks, but there was no marked advance in the later months of the year. A decline of net earnings, caused by the necessity of paying higher wages, and the opposition of the Interstate Commerce Com- mission to an advance of freight rates, were the explanations commonly given of the pessimistic feeling of the market. Other matters of complaint were fed- eral prosecutions of corporations, the prospect of further extension of federal control over railway charges, and the growing popularity of radical policies in politics — all tending, it was alleged, to shake the confidence of business men and investors. The money market gave no evidences of serious strain ; but the railways and other large corporations had increasing difficulty in selling bonds. And since they could not raise money on favorable terms these enterprises reduced their purchases of rolling stock, rails, etc., thus passing on the depres- sion to other industries. As in 1908 the rise of railway stocks foreshadowed an expansion of business, so in 1910 the fall of railway stocks foreshadowed a contraction. The dimin- ishing purchases of stocks and bonds, and the smaller issues of new securities brought with them in April a decline in the bank clearings of New York, The same month saw the beginning of a long decline in pig-iron production. From the centers of finance and industry the reaction spread slowly to other parts of the country. Outside of New York, clearings continued month by month to exceed those of the year before, but by ever narrower margins. Finally, in December the figures for 1910 fell below those for 1909. For the year as a whole, the volume of production in most lines was a trifle greater than that of the preceding year. But there was this significant difference — in 1909 the tide was rising ; it was ebbing in 1910. Toward the end of the year, however, it was currently believed that the liquidation had nearly spent its force, and that another expansion of business might be expected in 1911. MITCHELL: BUSINESS CYCLES 85 The first month or two of the new year seemed to justify this belief ; but the later months rudely dispelled it. On February 23, the Interstate Com- merce Commission announced its refusal to sanction the increases in rates which both eastern and western railways declared were necessary. In consequence, the railways adopted a policy of retrenchment, reduced their orders for new equipment, and postponed when possible their plans for extensions. In many other industries the leading enterprises adopted a similar policy because of numerous "trust prosecutions." Apprehension was allayed in a measure by the decisions of the Supreme Court in the Standard Oil and American Tobacco cases. While the court ordered both combinations to be dissolved, it applied the "rule of reason" in construing the "Sherman anti-trust act," and approved plans by which the companies might be reorganized without heavy loss to the shareholders. Fresh alarm, however, was caused in October by the bringing of a federal suit against the United States Steel Corporation. Throughout the year, in fact, enterprise on the part of large capitalists was materially checked by uncertainty regarding the legal position of business combinations. Hence all the trades that depend upon the volume of new construction put under contract found 1911 a dull year. Finance, of course, reflected this dullness in exaggerated fashion. Stock prices sagged downward to a low point in September, and the volume of trans- actions was smaller than in any year since 1898. Money was such a drug upon the market that New York banks found better rates for loans in Berlin and Paris than at home. New York clearings, affected by these conditions, fell 5 per cent below the moderate totals of 1910. Outside of New York, com- merce and industry were depressed, indeed, but moderately. Clearings indi- cated a gain, but one less than the average — 1.2 per cent. Poor crops probably had as large a share in this result as financial uncertainty. An unprecedented period of hot weather cut short the yields of grains. The hay crop was esti- mated to be the smallest since 1895, and the yield of potatoes was deficient. Alone among the great staples, cotton did well — indeed, better than well, for the crop was by far the largest on record. As a result of the short yield of breadstuffs here and abroad the cost of food advanced; but other prices were not well maintained. Towards the end of the year depression relaxed somewhat. But in view of the coming presidential election, the business prophets generally refused to make optimistic forecasts for 1912. 8G MEMOIRS OF THE UNIVERSITY OF CALIFORNIA XI. Summary One who turns from reading economic theory to reading business history is forcibly impressed by the artificiality of all assumptions of a "static" or even a "normal" condition in economic affairs. For, despite all efforts to give technical meanings to these ambiguous terms, they suggest the idea of an unchanging order, or of an order which economic principles are always tending to re-establish after every aberration. But a review of business annals never discloses the existence of a "static" or a "normal" state in either of these senses. On the contrary, in the real world of business, affairs are always under- going a cumulative change, always passing through some phase of a business cycle into some other phase. Prosperity is relapsing into depression, or becom- ing more, intense, or breeding a crisis ; a crisis is degenerating into a panic, or subsiding into depression; depression is becoming deeper, or merging into a revival of prosperity. In fact, if not in theory, a state of change in business conditions is the only "normal" state. In recent years these changes have run a broadly similar course in different countries. But the similarity is less close and less regular than is often implied by writers who are celebrating the Wcltwirtschaft. The business cycles of 1889-1911 synchronise better for England, France, and Germany than for any of these European countries and America. France had a crisis in 1889, some eighteen months before the Baring crisis occurred in England. German busi- ness revived in 1894, some time earlier than did French or English business. Again, in 1904 depression continued for several months in England after dis- tinct signs of revival had appeared in Germany and France. Finally, in 1910, France suffered a recession of activity while England and Germany were enjoying an increase in prosperity. But, save the last, these are all minor differences, and there is no grave inaccuracy in assigning similar dates for the beginning and end of each phase of the successive business cycles: crisis in 1889-90, depression until 1894, revival in 1894-95 running up to a flood tide of prosperity in 1899, crisis in 1900, depression until 1903-04, revival followed by great prosperity culminating in 1906, crisis in 1907, depression in 1908, and revival once more in 1909. These periods do not fit the United States. First the crop situation of 3891 destroyed the parallelism of events, making 1892 a good j^ear in America while it was a bad year abroad. Then the panic of 1893 was not accompanied by a crisis in Europe. Again, revival after this panic was delayed in the United States until the summer of 1897, while European business had begun to improve at least as early as 1895. The European crisis of 1900 was scarcely felt in America and general business continued to expand in the face of European MITCHELL: BUSINESS CYCLES 87 depression until 1903-04. The latter years were years of crisis here and years of depression abroad. On the contrary, the revival in the autumn of 1904, the prosperity of 1905-06, the crisis of 1907, the depression of 1908, and the revival of 1909 were nearly contemporaneous with similar developments in European business. At the very end of the period, however, another discrepancy appeared. In 1910 business activity declined in America, while it rose in Eng- land and Germany. With these differences in dates are joined differences in the intensity of prosperity, crisis, and depression. French business pursues by far the most even course. At the opposite extreme stands the United States, followed in order by Germany and England. The most striking evidence of the extremes to which American business runs is afforded by the peculiar violence of its transitions from prosperity to depression. Since 1889, England, Germany, and France have each had three crises ; the United States alone has had panics. The next step in the investigation is to examine in detail the various business phenomena which have characterized the periods of prosperity, crisis, and depression sketched in the present chapter. To appreciate the full significance of the statistical tables which form our chief reliance it is necessary to keep in mind the business character of each year in each of the four countries. Since this task imposes a considerable burden on the memory, a tabular summary of the business annals of 1889-1911 is appended in convenient form for reference. 88 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 1 Summary of Business Conditions in the United States, England, Germany and France, from 1889 to 1911 Years United States 1889 High tide of prosperity 1890 Money market stringent in summer; mild crisis in autumn 1891 Liquidation 1st half-year; revival 2d half-year on crop situation 1892 General business prosper- ous; heavy gold exports 1893 Panic; acute in May to October 1894 Deep depression 1895 Revival in summer, fol- lowed by relapse 1896 Eeturn of depression; pan- icky conditions in finan- cial markets 1897 1st half dull; 2d half great improvement on crop sit- uation 1898 Prosperity rising rapidly 1899 High tide of prosperity in general business; difficul- ties on stock exchange 1900 Slight pause in activity, followed by outburst of speculation in autumn 1901 Prosperity in general busi- ness; panic on stock ex- change May 9 1902 Prosperity continued 1903 Financial liquidation ; ' ' rich man 's panic ' ' ; general business still active 1904 Mild industrial depression; financial liquidation end- ed ; great stock-market speculation in autumn 1905 Rapid gain in prosperity 1906 High tide of prosperity; money market stringent 1907 Crisis, and severe panic in October to December 1908 Deep depression in trade and industry; revival in finance 1909 Recuperation, marked in 2d half-year 1910 Eeturn of depression in 2d half-year England High tide of prosperity; stringent money market in autumn Severe crisis in autumn — failure of Barings Financial prostration; no re- duction of trade; poor harvests Shrinkage of trade; poor crops and low prices Deep depression Depression continued; price of consols rose Strong revival 2d half-year Trade revival maintained Domestic business expanded; foreign trade stationary Improvement more rapid; real prosperity High tide of prosperity; money market stringent in autumn Crisis; mild recession of ac- tivity Ebbing of activity continued Slight improvement Disappointing year; business recovery very slow Depression continued till near end of year; more sanguine tone at close Revival made rapid progress High tide of prosperity; money market stringent Crisis, intensified by Ameri- can panic Depression, especially in for- eign trade; enormous of- ferings of new securities Revival of activity High tide of prosperity Germany France Prosperity; stringent money Crisis in March; moderate market in autumn liquidation Crisis in autumn Liquidation; bad harvests Depression deeper Deep depression Improvement toward close Revival continued Industrial prosperity in- creased Prosperity of increased in- tensity Brilliant year ' ' Annus mirabilis ' ' ; money market stringent in au- tumn Crisis; bank failures in au- tumn Crisis more acute Depression Slight improvement in latter part of year Improvement continued, but conditions uneven Revival made rapid progress High tide of prosperity; money market stringent Crisis, intensified by Ameri- can panic Marked depression, deeper in 2d half of year Revival of activity Prosperity increasing Mild depression Mild depression; bad har- vests Diminishing activity Business languishing or stag- nant Revival on bourse; inertia elsewhere Revival of commerce and in- dustry; minor crisis on bourse Moderate activity Greater activity; bad har- vests Mediocre year Marked activity of trade and industry Crisis; activity checked Further slackening of busi- ness Little change; mild depres- sion Distinct improvement Revival continued Further progress Full prosperity Prosperity continued; crisis liglrtly felt Check to activity Revival of activity Reaction; disastrous year for farmers 1911 Mild depression Continued prosperity Continued prosperity Partial recovery PART II STATISTICAL DATA CONCERNING THE BUSINESS CYCLES OF 1890-1911 IN THE UNITED STATES, ENGLAND, FRANCE AND GERMANY THE FRAMEWORK OP PART II In their several ways the three chapters of Part I state the problem to be dealt with, and mark out the line of attack to be followed in Parts II and III. Chapter I shows how many different processes of current life are capable of being made into plausible explanations of business cycles. By tracing the broad outlines of the economic organization which has developed on the basis of money economy, Chapter II shows which among these processes is of con- trolling importance, and how the subordinate processes find their unity in it. Finally, Chapter III, looking at the problem from the historical viewpoint, sketches the rhythmical expansions and contractions which business activity has undergone in recent years. Thus the actual courses followed by business cycles, the controlling factors in business activity, and the latest theories about the causes of prosperity, crisis, and depression are all before us. But to understand business cycles we need more definite and more systematic knowledge of the phenomena than has yet been provided. So much Chapter I makes clear. Are crises due to under-consumption ? — or to high costs of con- struction? — or to the dissimilar price fluctuations of organic and inorganic materials? — or to the lagging adjustment of interest rates to changes in the price level? To test such theories adequately we must know the facts. Does the demand for consumers' goods actually grow more slowly than the supply in the years preceding a crisis ? — do the costs of constructing new industrial equip- ment actually rise so fast as to discourage investment? — do the prices of farm products actually fluctuate in a different fashion from the prices of coal, iron, and copper? — do interest rates actually lag behind prices on the rise and fall? One and all, these crucial questions emphasize the need of comprehensive statistics.. We are not, indeed, planning to center the investigation about the testing of the theories reviewed in Chapter I; but for an investigation upon any lines we must provide such statistical data as these theories show to be required. To meet this requirement as well as may be is the task of Part II. Business statistics, however, are exceedingly voluminous, and some clear principle is needed as a guide no less in rejecting what is irrelevant than in selecting what is illuminating. Chapter I suggests the general rule that all data are pertinent which bear upon any of the causes assigned for business cycles by our numerous theorists. Chapter III shows what kinds of data are regarded as important by the empirical editors of business periodicals. Chapter II provides a definite [91] 92 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA framework within which all the ideas suggested by Chapters I and III may find their proper places. For this chapter shows that the money economy subordinates the industrial process of making goods and the commercial process of distributing them to the business process of making money. Accordingly, the ebb and flow of economic activity is brought into dependence upon the profits of business enterprises. Upon this basic fact the whole investigation rests. Profits, in their turn, depend upon the margins between buying and selling prices, and upon the volume of transactions. First, then, we must seek for data to measure variations in prices and variations in the volume of trade. And Chapter II makes it clear that the prices of importance in gauging profits are not merely the prices of commodities, but also the prices of labor, of loans, and of business enterprises themselves. But these statistics of prices and the vohime of trade, presented in Chapters lY and V, are far from covering the field. Business cannot be carried on without the use of currency and of bank accommodation. Accordingly Chapters VI and VII are devoted to the mechanism of exchange and to those changes in the condition of the banks which relate especially to their powers of lending. Chapter II also shows that the business men in control of enterprises are not the ultimate authorities in guiding economic activity; for their larger plans at any rate require the support of investors. Henice an attempt must be made to measure the fiuctuations in the sums saved and put into business enterprises — whether as stable investments or as speculative ventures. Chapter VIII has this aim. Finally, Chapter IX assembles the best of the materials which purport to show directly the changes in profits, and presents also the cognate statistics of bankruptcies. While each of the chapters which follow begins abruptly, ends abruptly, and stands in a measure alone, still the reader will appreciate that this collection of statistical data has been made on a definite plan. Every chapter bears upon the crucial problem of business profits, either by dealing with factors which determine profits, like prices and the volume of trade ; or by dealing with neces- sary conditions for the successful quest of profits, like the currency, banking, and investment; or by offering direct gauges of business success and failure, like the statistics of profits themselves and of bankruptcies. CHAPTER IV THE FLUCTUATIONS OF PRICES SINCE 1890 I. The Peicbs of Commodities 1. The Available Data and the Methods of Analysis For his original data concerning the prices of commodities a private inves- tigator must depend upon the materials published by governmental bureaus and by business periodicals. The books of business enterprises are not open to his inspection, and if they were his resources would be unequal to the heavy task of sifting out from the masses of useless entries the data fitted for statis- tical elaboration. Despite the growing interest felt in price movements, the published data still leave much to be desired. Out of the thousands of commodities bought and sold, the most extensive tables quote less than three hundred.^ The selec- tion depends less on the information which is desired than on the information which happens to be available. Goods which change substantially in quality from year to year must be rejected, and for goods which are usually the subject of private bargains it is difficult to secure quotations. For the most part, only those commodities are included which are dealt in on public exchanges and those for which dealers post their buying or selling prices. Hence it happens that the various parts of the system of prices are most unevenly covered. Relatively abundant quotations can be had for the staple raw materials, while the data concerning manufactured goods, whether used by producers or con- sumers, are relatively scanty. Moreover, the market reports and list prices given to the public cannot always be trusted, because many transactions are made on the basis of concessions from or additions to the standard rates. Particularly in times of crisis, when the markets become "demoralized," and in times of intense activity, when premiums are paid for quick deliveries, the published tables probably understate the real fall and rise of prices. Finally, a considerable part of the business transacted at any given time is done on the basis of prices fixed by earlier contracts, and these contract prices often differ notably from the current quotations. 1 The compilers of Dun's index number professed to include some 350 commodities; but they did not pub- lish the actual prices. [93] 94 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA With all its defects, however, the available material can be made to yield much information under systematic examination. If some conclusions go awry because of errors or omissions in the data, the blunders may prove the most effective stimulus toward securing better data for the future. For the impor- tance of full records of prices to communities where making and spending money is the road to welfare can be made most clear by boldly developing the full significance of the scanty present records. On examination, the recorded prices of different commodities at successive dates show a bewildering diversity of fluctuations. Some remain unchanged, some rise, some fall; the rates of advance and decline vary widely. Under these circumstances the primary aim of analysis is to ascertain merely the general trend of the movements — the average variations. The first step in the method employed for this purpose is to turn the actual prices of each com- modity into a series of relative prices, computed as percentages of the actual prices at some stated period. Wherever possible in the following tables, the average actual prices of the decade 1890-99 are taken as the basis ; that is, they represent 100 in the scale of relative prices. The second step is to add together the relative prices of the different commodities in each year, and divide the total by the number of commodities. The resulting arithmetic means of the relative prices may not be the most perfect measurements of average variation in prices; but they are sufficiently accurate for present purposes, and in addi- tion are easy to compute and easy to understand. To expend much labor in refined elaboration of data subject to a broad margin of error is pedantic. Occasion will presently arise to discuss the representative character of these index numbers, and to show how wide a field is covered by deviations from the average.' Meanwhile the method just described is applied to measure the average fiuctuations characteristic of different parts of the system of prices. The presentation corresponds as closely as may be to the analysis of that system made in Chapter II. ■ 2. The Prices of Consumers' Goods at Retail The only systematic collection of American prices at retail since 1890 is a table compiled by the United States Bureau of Labor, showing the prices of thirty staple foods. The data are collected by agents of the bureau from upwards of a thousand retail dealers in toAvns dotted all over the country.^ The results of this investigation in their most general form are given in Table 2.* 2 See subdivisions 7 and 8 of the present section. 3 For a full description of the character and scope of the data see Eighteenth Annual Eeport of the Com- missioner of Labor, pp. 635-661, and Bulletin of the Bureau of Labor, July, 1908, pp. 181-214. i Here, and in most of the subsequent tables, I have dropped the decimal places. Decimals make com- parisons between difEerent figures somewhat less easy, and the appearance of greater accuracy which they give to index numbers is delusive. The margin of error in the original data makes vain the pretension to accur- acy within one-tenth of one per cent. For the original figures see Bulletin of the Bureau of Labor, July, 1908 p. loO. MITCHELL: BUSINESS CYCLES 95 TABLE 2 Relative Retail Prices op Thirty Staple Foods in the United States. By Yeaks, 1890-1907 Arithmetic means. Average actual prices in 1890-99 = 100 1890.. 1891.. 1892.. 1893.. 1894.. 1895.. 1896.. 1897.. 1898.. 102 103 102 104 100 98 96 96 98 1899- 100 1900 102 1901 105 1902 Ill 1903 Ill 1904 112 1905 118 1906 116 1907 121 These figures indicate a certain correspondence between retail prices and business conditions. In 1893, indeed, the thirty foods rose slightly instead of falling ; but they declined during the dull years Avhich followed the panic, and rose again when prosperity returned. This rise was slow until 1900-02; it became slow again in 1902-04; but rapid in 1905-07. The panic of 1907 came too late in the autumn to exercise much influence upon the average retail price level of that year. On the whole, this series reflects the course of business cycles more faithfully than might have been expected. For the supply of vegetable and animal foods varies in an arbitrary fashion determined by the weather, and the demand for staple foods is less affected by prosperity and depression than that for more dispensible commodities.^ = Since this chapter was written the Bureau of Labor has begun to publish a new index number of food prices at retail. Unfortunately, this new series is not fairly comparable with the old one, because (1) the number of commodities has been reduced from 30 to 15, (2) the description and presumably the quality of several of the commodities included by both series has been changed, and (3) the data for the new series are collected from a new and smaller list of towns. The results of the two series agree closely in 1890-1900, but in 1901-07 the new series shows a distinctly higher level of fluctuations. As between the two, the older and more comprehensive series appears to be the more trustworthy. The soje advantage of the new series is that it covers the years since the last great crisis. In the bad year 1908 food prices rose; they lose further during the business revival of 1909, and further still during the reaction of 1910, but finally subsided a little in the dull times of 1911. The simple averages of the two series are as follows: " Old series New series 30 commodities 15 commodities 1890 102.1 102.0 1891 103.4 103.6 1892 101.8 101.7 1893 104.1 104.6 1894 100.3 99.5 1895 98.2 97.2 1896 95.8 94.9 1897 96.3 96.4 1898 98.5 99.4 1899 99.6 100.6 1900_ 101.5 102.9 Old series New series 30 commodities 15 commodities 1901 105.5 109.5 1902 110.9 116.8 1903 110.9 116.9 1904 111.6 118.3 1905 112.5 118.3 1906 116.2 122.4 1907 120.7 128.0 1908 132.5 1909 140.3 1910 148.5 1911 146.9 See Bulletin of the Bureau of Labor, no. 105, Part I, "Retail Prices and Cost of Living Series." August 23, 1912. 96 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA 3. The Prices of Consumers' Goods at Wholesale Three index numbers of wholesale prices in the United States are currently published, one by the federal Bureau of Labor, one by Bradstreets' , and one by Thomas Gibson in continuation of the Dun series which was suspended in May, 1907." None of these index numbers in its published form suffices for the purposes of the present investigation, because in none of them are prices grouped in such fashion as to correspond to the divisions of the system of prices outlined in Chapter II, or in such fashion as to admit of testing certain theories of business cycles summarized in Chapter I. It is therefore necessary to work out new results from the published materials. For this purpose, the Bureau of Labor tables afford the best source. The prices of single commodities included in Dun's series have never been published, while Bradstreets' data in their present form do not begin before 1892 and cover only 106 articles. The following tables have been made, accordingly, by regrouping and averaging the series of relative prices found in the Bulletin of the Bureaii of Labor.'' Of the 145 series of relative prices derived from this source, 55 are for commodities bought almost exclusively for family consumption.' To gauge the correspondence between the fluctuations of consumers' goods at wholesale and retail, however, it is best to use data for substantially similar commodities. Twenty-five of the thirty foods included in Table 2 are also included in the wholesale price data. Accordingly it is possible to present a comparison between prices at wholesale and retail which is not vitiated by the presence of dissimilar commodities in the two lists." li See Bulletin of the Bureau of Labor, March issue of each year since 1902; Bradstreets' , passim; J. P. Nor- ton, Quarterly Journal of Economics, August, 1910, pp. 750-759. 7 A convenient summary of the American and foreign index numbers for varying periods of years is given in the Seport of the Massachusetts Commission on the Cost of Living, Boston, 1910. See also subdivisions 8 and 9 of the present section. 8 The bureau's tables include about 250-260 commodities; but many are nearly identical articles; for ex- ample, 10 varieties of cotton sheetings. In dealing with such groups I have preferred to use only the average relative prices of all the series included within them. The bureau's method obviously allows the commod- ities represented by several varieties to exercise undue weight upon the results. It is this process of group- ing which reduces the number of series from over 250 to 145. The new results, however, differ little from the old — a fresh confirmation of the often noted fact that systems of weighting make comparatively slight differences in a large index number. See Table 9, below. Such is the case with the Bureau of Labor 's comparison between the relative prices of 30 foods at retail and 54 foods at wholesale (Bulletin, July, 1908, pp. 195, 196). In order to make the comparison still closer I have not used relative retail prices for the whole country, as in Table 2, but for the North Atlantic states when the wholesale prices are from New York, and for the North Central states when the wholesale prices are from Chicago. The list of foods included is as follows: Apples (evaporated), beans, beef (fresh), beef (salt^ bread, butter, cheese, coffee, cornmeal, eggs, fish (salt), flour (wheat), lard, milk, molasses, mutton, bacon' pickled pork, hams, potatoes, prunes, rice, sugar, tea, vinegar. MITCHELL: BUSINESS CYCLES 97 TABLE 3 Relative Prices of Twenty-five Staple Foods at Retail and Wholesale in the United States By Years, 1890-1907 Arithmetic means. Average actual prices in 1890-99 = 100 Year 1890 At retail 102 Alt wholesale 109 Year 1899 At retail 99 At wholesale 96 1891 104 113 1900 101 101 1892 102 105 1901 105 104 1893 105 115 1902 110 113 1894 100 103 1903 110 107 1895 98 96 1904 110 106 1896 95 84 1905 111 107 1897 96 86 1906 114 113 1898 98 93 1907 119 117 120 110 100 90 eo Relative. Chart I. Prices of Twenty- Five Staple AT Wholesale and Retail. 1890 - 1907. Foods 120 110 100 90 80 AT WHOLESALE. / \ 1 1 \ \ \ / \ ^ r"^ \ s 1 1 \ \ \ ^-^ ^ / \ \ ■■■^^ ^^^ / ^ \ \ / / .-" / f \ \ / / 1890 91 '92 '93 '94 '95 '96 '97 '98 '99 1900 '01 "02 '03 '04 'os 'OG '07 98 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA While these two series agree closely in the general trend of fluctuations, the retail prices are much more stable. They lag behind wholesale prices both on the rise and on the fall, but more on the fall than on the rise. It is primarily because retail prices yielded scarcely at all to the depression of 1903-04, while wholesale prices fell several points, that the retail level stood higher in 1907."* 4. The Prices of Producers' Goods As consumers' goods at retail are more stable in price than the same goods at wholesale, so consumers' goods, even at wholesale, are more stable in price than producers' goods. The next table establishes this fact by comparing the relative prices of 55 commodities bought almost wholly for family use and of 73 commodities bought almost wholly for business use. The availability of data by months for recent years makes it possible to carry out this comparison in detail for the period including the latest crisis, depression, and revival of business activity. TABLE 4 Eelative Prices or C'onsumeks ' and Producers ' Goods at Wholesale in the United States Arithmetic means. Average actual prices in 1890-99 = 100 By Years, 1890-1910 Year 1890 Consumers' goods 115 Producers' goods 115 Year 1902 Consumers' goods . 107 Producers' goods 119 1891 111 113 1903 106 120 1893 105 106 1904 107 120 1893 108 102 1905 107 124 1894 99 92 1906 112 132 1895 94 92 1907 119 140 1896 89 89 1908 115 125 1897 90 88 1909 118 131 1898 94 94 1910 123 140 1899 1900 97 107 109 117 Averages 1890-99 100 100 1901 107 113 1900- 09 111 124 sa The new retail-price index number mentioned in note 5 makes it possible to extend this comparison through 1911, albeit with only 11 instead of 25 commodities, namely, bacon, beef, butter, corn meal, eggs, granulated sugar, hams, lard, milk, potatoes, and wheat flour. ki At retail wholesale 1907 127 124 1908 132 130 1909 139 144 1910 .'.... 147 146 1911 145 133 The lagging adjustment of retail to wholesale price fluctuations is strongly marked in these figures. MITCHELL: BUSINESS CYCLES 99 TABLE i— (Concluded) By Months, 1907-1910 Tear Consumers' Producers' Consumers' Producers goods goods Year goods goods 1907 January 116 140 1909 January 116 127 February 117 142 February 116 127 March 117 143 March 116 127 April 115 143 ,0 1 ,.•' ■■■■\ A v h 1 1 !/ \ ■•••\ / \ \ ■••... / J- ^^^ *^'^Z \ / ^ ^ I 1890 91 92 93 '94 '95 '96 97 '98 '39 1900 01 '02 03 '04 "05 '06 07 '08 '09 1910 MITCHELL: BUSINESS CYCLES 101 TABLE 5 Relative Wholesale Prices of Eaw Materials and Their Products in the United States Arithmetic means. Average actual prices in 1890-99 = 100 By Years, 1890-1910 Twenty pairs Five triplets Year 1890 t Baw 113 Mfd.' Ill Raw 127 Partly mfd. 115 Finishec 108 1891 114 114 117 115 107 1892 104 106 104 110 106 1893 99 104 95 103 105 1894 90 94 78 89 98 1895 94 95 88 90 95 1896 86 89 86 92 94 1897 89 90 93 90 94 1898 99 93 99 94 95 1899 113 104 113 100 98 1900 119 112 116 112 105 1901 120 112 109 101 102 1902 127 120 120 103 103 1903 124 115 123 109 106 1904 123 113 127 115 109 1905 128 119 130 114 114 1906 135 123 132 115 121 1907 145 133 137 120 121 1908 133 124 130 114 116 1909 142 128 146 124 117 1910 148 133 148 123 120 Averages 1890-99 100 100 100 100 100 1900-09 130 120 127 113 111 Twenty Pairs by Months, 1907-1910 1907 Month Raw Mfd. Raw Mfd.' Raw Mfd.' Raw Mfd.' January 144 130 136 129 138 122 155 136 February 147 131 131 128 137 123 156 137 March 147 133 134 127 138 125 157 140 April 146 134 133 127 139 126 153 136 May 149 135 132 125 144 129 148 135 June 148 136 129 123 143 129 146 133 July 146 135 131 122 142 129 144 132 August 144 132 135 121 138 129 147 132 September 148 134 135 122 142 128 145 131 October 148 134 133 121 145 129 143 129 November 139 133 134 121 149 131 143 127 December 135 129 136 123 152 133 144 127 102 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 5— (Concluded) Five Triplets by Months, 1907- •1910 1907 1908 • 1909 1910 Month January Raw 134 Partly mfd. 117 Finished 119 Raw 130 Partly mfd. 120 Finished 119 Raw 135 Partly mfd. 116 Finished 116 Raw 159 Partly mfd. 129 Finished 120 February 136 .117 119 126 117 118 137 118 115 156 128 120 March 133 117 120 123 117 117 135 120 115 151 126 120 April 133 117 120 123 113 116 139 122 115 150 125 121 May 139 120 120 130 113 116 147 125 118 151 123 120 June 143 122 121 131 111 114 150 129 117 148 121 120 .Tuly 143 123 122 132 111 114 150 128 118 147 122 120 August 141 123 122 133 113 114 146 126 119 150 122 119 September 142 123 122 131 113 114 147 124 119 142 120 119 October 139 124 122 131 115 115 154 127 119 143 120 119 November 133 121 121 133 114 116 158 129 119 140 119 119 December 132 121 121 134 116 116 160 128 120 139 120 119 The table shows that, whether the comparison be by months or years, the prices of raw materials respond more promptly and in larger measure to changes in business conditions than do the prices of their products. Since the five partly manufactured products pursue a course intermediate between their raw materials and finished goods, it seems that the more manufacturing costs have been bestowed upon materials the steadier do their prices become. This result suggests that the greater stability in the prices of consumers' goods in comparison with producers ' goods noted above may result simply from the fact that the consumers' goods are chiefly finished products, while the pro- ducers' goods are largely raw materials. This suggestion may be tested by excluding the raw materials from both classes and confining the comparison to manufactured articles bought for family and for business use. These exclu- sions reduce the numbers of commodities in the two lists to 47 and 28 respec- tively. A similar comparison between the relative prices of raw materials bought by families and business enterprises is hardly feasible ; for there are few consumers' goods in the list which, like onions, can fairly be regarded as raw. But it is permissible to introduce the 45 raw producers' goods for the additional evidence they bear to the greater stability of manufactured articles. MITCHELL: BUSINESS CYCLES 103 TABLE 6 Relative Wholesale Prices of Manufactured Consumers' Goods and op Raw and Manufactured Producers' Goods in the United States. By Years, 1890-1910 Arithmetic means. Average actual prices in 1890-99 = 100 Manufact ared articles Raw materials Number of commodi Year 1902 Manufactured articles Raw materials commodities 47 Consumers' Tear goods 1890 112 28 Producers' goods 115 45 Producers' goods 115 ies 47 Consumers' goods 108 28 Producers' goods 114 ' 45 Producers' goods 123 1891 109 111 114 1903 108 114 123 1892 105 107 106 1904 108 114 123 1893 107 102 101 1905 109 117 128 1894 99 92 92 1906 113 124 138 1895 94 91 92 1907 122 132 145 1896 92 93 87 1908 115 118 130 1897 90 89 88 1909 119 117 139 1898 94 93 94 1910 121 125 149 1899 98 1900 109 107 117 110 117 Averages 1890-99 100 100 100 1901 107 113 114 1900- 09 112 118 128 130 120 110 100 90 Reuative Pr Used by Chart 4 ICES OF Manufactured Commodities Producers and bv Consumers. 1890-1910 140 130 .120 110 100 90 WDUCERS' COMMODITIES JIMSUMERS' COMMODITIES / Cc / J. ^. / \ y / / / / r \ • / N \^' \ l\ 1 1 1 '*'"N.. - "^ " • \ > -^ s /' 1 1890 '91 '92 '93 "94 '95 '96 '97 '98 '99 1900 '01 '02 '03 '04 'OS 'OG '07 "08 '09 1910 104 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA On the whole, the manufactured goods used by producers show the wider oscillations. They stood higher in 1890, fell slightly lower in the depression following 1893, rose more rapidly from 1897 to 1900, and again from 1904 to 1907, and finally fell further from 1907 to 1908. The raw producers' goods, to be sure, exhibited still wider oscillations; but the evidence, so far as it extends, supports the contention that the relative demand for and supply of producers ' goods is more sensitive to alterations of business conditions than the relative demand for and supply of consumers' goods. This table may there- fore be regarded as affording a statistical foundation for the theory of business cycles which Carver has suggested." 6. The Prices of Organic and Inorganic Goods Sombart's theory that business cycles are caused by the different rhythms of production in the organic and inorganic realms suggests another arrange- ment of the price data. The inorganic goods in the list comprise 41 mineral products. The much larger number of organic goods may advantageously be subdivided into 19 forest, 41 animal, and 58 farm products. Both mineral and forest products are turned out in the United States under conditions which permit a quick adjustment of the supply to alterations in demand. Animal products, on the other hand, require a year or two for growth, while the supply of vegetable products raised on the farm depends quite as much on the weather as on the efforts of farmers to adapt their production to market conditions. Table 7 gives the relative prices of these four groups of commodities in three arrangements : manufactured goods and raw materials together, and then each separately. The basis of comparison in the separate tables is rather slender; but without such a division it might be suspected that the differences between the several groups are caused primarily by the unlike proportions of raw materials and manufactured goods constituting them.'^ 11 See Chapter I, ii, 12. 12 There is a slight discrepancy between the monthly and the annual figures for farm products, both raw and manufactured, in 1908. It is due to the omission by the Bureau of Labor of quotations for five months in making up the average of prices of onions and buckwheat flour for the year. See Bulletin of the Bureau of Labor, March, 1909, pp. 303, 306. MITCHELL: BUSINESS CYCLES 105 -n 7 180 Chart 5. / / 1 140 Relative Priceis of Raw Mineral. 1 1 170 leo 150 140 Forest , Animal and Farm Products. 1890-1910. / / f \ X V / 1 1 MINERAL Products Forest Products ^Vnimal Products 'ARV^ Products / / / / / I \ \ \ 1 / / / 1 / / — / / 1 , y / / 130 120 110 100 / 90 80 70 1 1 1 1 / / / / . v«": // 130 120 no 100 90 .•' / ■H' h V y /•' \ \ \ s / \ // // f ^- ,• / i f -^ >< \ \ ¥ / / \ \ \ /■ 7 80 \ 70 1890 '91 '92 '93 '94 '95 '96 '97 '98 '99 1300 01 '02 '03 '04 05 '06 '07 '08 '09 1910 106 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Belative Wholesale Prices of Mineral, Arithmetic means. Both raw and manufactured goods TABLE 7 , Forest, Animal, and Average actual prices By Years, 1890-1910 Raw materials Farm Products in the United States in 1890-99 = 100 Manufactured goods Number of commodities Year 1890 41 19 Mineral Forest products products 117 111 27 Animal products 106 58 Farm products 117 ' 18 10 9 Mineral Forest Animal products products products 119 107 104 18 Farm products 119 23 9 18 Mineral Forest Animal products products products 116 116 107 40 Farm products 116 1891 112 107 109 117 111 105 109 125 112 109 109 113 1892 105 103 108 107 105 99 109 108 105 107 108 106 1893 101 101 112 106 98 98 116 104 103 104 110 107 1894 91 95 97 98 86 95 95 98 94 96 98 98 1895 91 96 93 93 90 96 95 92 91 96 92 94 1896 93 95 87 85 92 94 82 76 94 96 89 89 1897 88 92 91 87 88 95 88 85 88 89 92 88 1898 92 94 96 93 92 99 97 96 92 89 95 92 1899 111 105 100 97 119 112 105 97 105 98 98 97 1900 116 117 110 107 119 121 111 111 114 111 109 105 1901 112 111 109 108 113 113 115 121 111 109 106 102 1902 113 117 119 111 120 123 131 122 108 110 112 106 1903 116 125 115 108 126 138 118 118 108 111 113 104 1904 110 129 112 113 115 142 115 124 106 115 111 108 1905 114 135 119 109 124 149 124 116 107 120 117 106 1906 122 145 125 114 137 163 131 119 110 125 122 112 1907 125 152 128 126 139 169 136 133 115 134 124 123 1908 111 137 124 121 119 151 129 131 105 121 121 116 1909 112 143 135 122 121 164 149 138 105 120 129 114 1910 114 159 142 128 121 182 158 145 109 134 133 120 Averages 1890-99 100 100 100 100 100 100 100 100 100 100 100 100 1900-09 115 131 120 114 123 143 126 123 109 118 116 110 By Months, 1907-1910 Number of commodities Both raw and manufactured goods 41 19 27 58 Mineral Forest Animal Farm products products products products Raw n laterials » [anufact ured goods 18 10 9 18 Mineral Forest Animal Farm products products products products 23 9 18 Mineral Forest Animal products products products ] 40 Farm products 1907 January 128 151 131 117 146 170 145 124 115 130 125 114 February 129 153 132 119 148 171 145 127 115 134 125 115 March 129 156 129 121 146 174 136 131 115 136 125 116 April 128 158 128 120 143 177 133 127 116 137 126 117 May 128 157 126 123 144 174 131 134 116 139 124 118 June 128 155 124 127 143 171 130 138 116 138 122 122 July 127 154 125 127 141 170 131 134 116 136 122 125 August 124 155 126 129 137 170 135 131 114 137 122 127 September 123 153 128 131 134 168 137 135 115 136 124 129 October 120 150 131 134 131 164 142 141 112 135 126 181 November 119 148 128 130 128 162 136 135 112 131 124 128 December 117 139 126 128 122 153 130 135 112 124 124 126 MITCHELL : BUSINESS CYCLES 107 TABLE 7— \Conclud,ed') Number of /— Both raw and manufactured goods 41 19 27 58 ' ilineral Forest Animal Farm roducts products products products 113 139 124 127 Raw materials Manufactured goods commodities 1 Month p 1908 January 18 10 9 18 Mineral Forest Animal Farm products products products products 120 151 125 136 23 9 18 40 Mineral Forest Animal I'arm products products products products 108 125 124 123 February 112 143 122 125 119 153 120 134 107 131 123 121 March 112 139 123 125 120 151 120 136 106 126 124 119 April 111 141 123 123 119 154 122 134 106 126 124 118 May 110 139 121 123 118 153 119 136 103 123 122 117 June 109 134 120 121 116 148 121 136 103 118 120 115 July 109 134 122 122 116 148 128 137 103 119 119 116 August 110 133 123 121 118 146 131 135 104 117 119 115 September 110 132 125 119 117 146 136 129 105 116 119 114 October 111 134 127 118 118 151 140 130 105 116 120 116 November 112 135 128 117 120 153 144 128 105 115 120 112 December 113 139 130 117 121 157 147 129 106 119 122 112 1909 January 113 139 130 117 122 156 145 129 106 120 122 111 February 112 138 129 119 120 155 144 134 106 119 122 112 March 110 137 131 120 117 155 139 139 105 117 127 111 April 110 138 131 122 108 156 137 143 103 118 128 112 May 109 138 132 124 119 157 141 149 102 118 128 113 June 109 139 132 124 118 159 141 148 103 118 128 114 July 110 140 134 123 117 162 144 144 104 116 129 113 August 110 145 135 119 118 169 146 131 104 119 130 114 September 112 149 138 119 121 174 153 131 106 121 131 114 October 114 152 141 122 126 175 158 134 106 125 132 116 November 116 151 144 125 127 173 167 138 106 126 133 119 ~^ December 116 150 146 127 129 173 168 142 107 126 135 121 1910 January 117 151 147 130 129 173 168 147 108 127 136 122 February 117 154 146 129 127 176 165 147 109 129 136 121 March 116 156 150 128 126 179 169 144 109 131 140 121 April 115 160 349 124 123 187 165 137 110 130 141 119 May 114 160 143 126 120 188 156 141 109 128 136 119 June 113 159 140 123 119 186 152 137 109 128 135 116 July 113 162 136 127 118 188 147 144 109 134 131 119 August 114 164 :37 129 117 187 150 149 108 139 130 120 September 113 164 139 129 118 185 158 148 109 139 130 121 October 113 162 139 130 118 181 159 145 109 141 129 123 November 113 160 137 128 119 180 156 146 109 138 128 120 December 114 160 136 129 119 181 154 146 110 138 127 121 The first section of Table 7, in which raw materials and finished products are lumped together, seems rather inconclusive. All the groups rise and fall in general conformity with business conditions, and all exMbit certain contrary movements. More significant results appear, however, as soon as the materials and finished goods are segregated. In each of the four groups of products the greater stability in price of manufactured goods, brought out by Table 5, is 108 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA shown once more. So far, indeed, have manufactured goods lagged behind raw materials on the rise that their prices in 1909 stood lower than in 1890 in the case of mineral and farm products, and but slightly higher in the case of forest products, despite an increase in the cost of materials. If the figures are representative, there has been a reduction in manufacturing costs which nearly offsets or more than offsets the increased cost of materials, save in the case of animal products. These fluctuations in the prices of finished goods, however, are but a pale reflection of the changes in the markets for raw produce. It is, then, in the sensitive prices of the latter that we must seek a statistical basis for Sombart's theory. The prices of raw mineral and raw farm products present the most effective contrast. While both accord broadly with the course of business cycles, the farm products show more frequent and more striking movements of a contrary sort. In the dull year 1891 farm products rose in price while mineral products fell ; farm products did not rise in price during the temporary revival of activity in 1895, as mineral products did; farm products rose in 1901 while mineral products fell; farm products rose in the face of business depression in 1904 while mineral products fell; finally, farm products declined but two points while mineral products declined twenty points in the depression of 1908. Such evidence goes to support Sombart's contention of a dissonance between the movements of prices in the organic and inorganic realms. But a dissonance hardly less striking appears between the movements of prices in the two remaining groups — forest and animal products — both belong- ing to the organic realm. Animal products rose in the dull year 1891 and the crisis year 1893, while forest products fell; animal products did not rise when business revived in 1895, while forest products did, though slightly; animal products alternately rose and fell from 1901 to 1907, while forest pro- ducts advanced each year. In brief, the prices of animal products corresponded less accurately than the prices of forest products to changing business condi- tions from 1890-99 and more accurately from 1900-09. In both decades the dissonance is marked. Of the four series, the inorganic mineral products reflect the business cycles with least distortion for the whole period; but their superiority as a "trade barometer" over the organic forest products is due chiefly to the steady rise of the latter from 1901-07. This rise, unbroken even in 1904, is doubtless due to a gradual reduction in the supplies of lumber within easy reach of the great eastern markets from which the quotations come and to a closer organization among the lumber interests. In every year since 1902 the forest products have cost relatively more in comparison with their average prices in 1890-99 than any of the other groups. That is, a depletion of natural resources more rapid in the case of the forests than of the mines seems to have occurred in the last decade. But the opposite may well happen in some future decade, and prevent MITCHELL: BUSINESS CYCLES 109 the supply of mineral products from being adjusted to demand with greater facility than in the case of forest products. In the case of animal and farm products, however, where dependence is not upon natural deposits of minerals and forests which have grown through decades, but upon the fruits of human labor during one or two seasons, frequent contradictions between the move- ments of prices on the one hand and changes in business conditions on the other hand, seem likely to continue for an indefinite time to come. Sombart's theory, in other words, might be more accurately formulated in terms of con- trast between goods the supply of which within short periods depends largely upon the weather, and goods the supply of which within short periods depends almost entirely upon the activity of enterprise. While at present the inorganic mineral products seem to excel the forest products as well as animal and farm products in this respect, it is but recently that they have come to do so in the United States, and the time may come again when they will lose this position. The monthly figures for 1907 and 1910 confirm the conclusions suggested by the yearly figures. In each of the four groups the crisis of 1907, the depression of 1908, and the revival of 1909, affected the prices of raw materials earlier and more seriously than they affected the prices of manufactured goods. And as between the various classes of raw materials, mineral products record the changes in business conditions more faithfully than any of the other groups. 7. The Dispersion of Price Fluctuations While the arithmetic means so far presented show that different parts of the system of prices have distinct types of variation, they fall far short of doing justice to the wide diversity of price fluctuations. This diversity deserves more attention than it has commonly received; for it is not only one of the most constant and most characteristic features of contemporary economic life, but it also has an important bearing upon business cycles. For exhibiting the range covered by price fluctuations the best contrivance is the table of decils. Decils are points which divide a series of numbers, like the relative prices of different commodities on the same date, into ten equal groups. They correspond in character to the more familiar medians and quartils — indeed, the fifth decil is the median. All of the 145 series of relative prices derived from the Bureau of Labor are included in Table 8. In 1909, for example, one commodity had a relative price as low as 48, and another had a relative price as high as 243. Thus the arithmetic mean for that year, 121 represents relative prices which are scat- tered over a range of almost 200 points. But three-fifths of the 145 commod- ities had relative prices falling within a much narrower range — 44 points, the difference between the second and eighth decils — and one-fifth fell within limits of ten points — the difference between the fourth and sixth decils. 110 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA This range of dispersion differs greatly from year to year, shrinking when prices fall and expanding when they rise. For the whole period covered by the table it averages 142 points ; but it drops to 72 points in 1897, and rises to 315 points in 1910. Conversely, concentration around the median becomes denser when prices fall and less dense when they rise. The average margins between the decils run as follows for the twenty years 1890-1909 : O " ai to ri w CO ."3 5.S g.: "5 w oors 2'S^ fii'o ®*5 "S s '"n. ^ \ 1 \ \ / k ■-- / y y\ \y \y J K \ \ ^x. s T y % \ y /^ ^ \ \ ~ \, "^ / 60 40 \ / / I \ s / SO 40 \ \ \ \ / / / \ \ \ t 1 1 1 \ \ i 1 1 \ \ s / / / / \ \ \ \ \ \ y f — 1890 '31 32 '95 '34 '35 '36 '37 '98 93 1300 01 '02 '03 '04 '05 '06 '07 '08 '09 1910 112 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 8 Decils of Eelative Prices at Wholesale in the United States By Years, 1890-1910 Year 1890 Lowest relative price 86 1st decil 97 3d decil 101 3d decil 105 4tll decil 108 Median 112 6th decil 116 Tth decil 119 8th decil 126 9th decil 133 Highest relative price 160 1891 74 99 101 105 109 111 113 116 122 132 158 1892 61 92 99 101 104 107 108 111 114 118 141 1893 70 90 96 100 102 104 106 109 111 119 158 1894 46 79 85 91 94 96 99 101 103 111 129 1895 53 79 86 88 91 94 95 98 100 105 149 1896 39 71 79 85 88 90 92 95 98 100 142 1897 56 71 78 85 88 91 93 95 98 102 128 1898 48 77 84 87 91 94 96 99 101 108 155 1899 46 86 89 94 97 100 103 108 112 129 149 1900 59 90 98 102 106 109 113 118 123 136 192 1901 49 90 97 101 104 107 111 115 120 133 222 1902 45 91 98 102 107 110 114 119 134 145 194 1903 43 90 98 104 108 111 114 121 129 143 192 1904 60 91 98 103 106 112 117 120 130 143 197 1905 59 85 97 104 110 114 120 126 131 149 238 1906 62 89 100 108 114 119 124 131 137 159 279 1907 42 95 104 112 121 129 132 139 147 171 304 1908 45 89 102 107 113 119 124 130 139 156 228 1909 48 89 102 111 117 121 127 135 146 172 243 1910 48 86 103 112 118 124 132 144 154 187 363 Averages 1890-99 58 84 90 94 97 100 102 105 109 116 147 1900-09 51 90 99 105 111 115 120 125 134 151 229 8. Tlie Representative Character of Index Numbers Before launching upon international comparisons, we must face the problem whether the available index numbers are trustworthy representatives of the average price variations in the several countries. The best known American, English, French, and German series differ widely in the number and character of the commodities included and in the basis of computation. That unlike lists of commodities may be expected to yield unlike results follows from the preceding demonstration that there are specific differ- ences of variations between the prices of consumers' and producers' goods, of raw materials and manufactured articles, and of mineral, forest, animal, and farm products. May not the divergences found between series for the several countries be due chiefly to the varying proportions in which these categories of commodities are represented? Other doubts are suggested by the table of decils. If relative prices are dispersed over a range averaging more than 100 points, what warrant have we for trusting the foreign index numbers computed from data for less than fifty commodities? MITCHELL: BUSINESS CYCLES 113 The best method of answering these questions is to compare different index numbers which purport to show the trend of wholesale prices in the same country. If they agree substantially, despite dissimilarities in lists of com- modities and methods of computation, then the results of comparisons between index nxmibers for different countries may be accepted as showing real agree- ments or disagreements in the movements of the price levels. There are five American index nmnbers which may be submitted to this test. All are made from quotations from the great wholesale markets of the northeastern and north central states, but they are strikingly unlike in other respects. Dun's index number is not an average of relative prices, but a sum of actual prices in dollars and cents. It purports to give "the cost of a year's supplies of all the necessaries of life" for a single individual. Three hundred and fifty articles are said to be included, and the price of each is said to be multiplied "by the quantity annually consumed by each inhabitant, as nearly as may be ascertained by statistical records." How far the results may be trusted is uncertain, because the compilers never disclosed their list of commodities, their sources for quotations, or their methods of estimating per capita consumption. After May, 1907, Dim's Revieio ceased to publish this index number; but the Gibson Publishing Company have undertaken a continuation. The Gibson index differs from Dun's in reducing the number of commodities from 350 to 50, and in substituting averages of relative prices for sums of actual prices. It resembles Dun's index in allowing foods a weight of 50 per cent, textiles 18 per cent, and minerals and miscellaneous goods 16 per cent each. Compu- tation of the Gibson index for 1890 to 1906 shows that it agrees less well with the Dun figures for these years than with the figures of the other series pres- ently to be described. On the whole, the Dun-Gibson index commands less confidence than its rivals." Bradstreet's index is also a sum of actual prices. It shows "the totals of the prices per pound of 96 articles," on the first day of each quarter from 1892 to 1898, and on the first day of each month from 1899 to date. The figures listed in the table are averages for the years." Neither Dun's nor Bradstreet's series in its original form can be compared properly with the series compiled by the Bureau of Labor. For sums of actual prices are not comparable with averages of relative prices. It is therefore necessary to convert these two series into relative figures on the basis used by the Bureau — average actual prices in 1890-99 equal 100. This conversion may be effected approximately by dividing the original figures by numbers which 13 For a description of Dun's index see the Bulletin of the Department of Labor, March, 1902, pp. 211, 212; for the results see Statistical Abstract of the U. S., 1907, p. 569; for the method of continuation by the Gibson index see J. P. Norton, Quarterly Journal of Economics, August, 1910, pp. 750-758 ; for a criticism of the whole series see W. C. Mitchell, ibid., November, 1910, pp. 161-170. 11 The full table for 1892 to date is currently published by Bradstreet's in the second weekly issue for each month. 114 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA show the ratio of their sums for 1890-99 and 1892-99 respectively to the corre- sponding sums of the Bureau of Labor's figures — namely, 1,000 for 1890-99 and 775.4 for 1892-99/=^ These two revised series are followed by three made from materials pub- lished in the Bulletin of the Bureau of Labor. One gives the arithmetic means of the relative prices of the fifty commodities included in Gibson's index; a second the Bureau's own average for "all commodities," about 250 in number; a third gives the arithmetic means of the 145 series of relative prices which have been used in the preceding tables." When these five series are put side by side, as in Table 9, they are found to agree substantially regarding the broader movements of the price level. All show a heavy decline from 1890 to 1896 or 1897, a rise from these dates to 1900, a hesitating course from 1900 to 1904, an extremely rapid rise from 1904 to 1907, a sharp drop in 1908, and a recovery in 1909. But in detail there are numerous differences. One indicates that prices rose in 1890-91, two that prices fell slightly, one that they remained constant. One makes 1897 and two make 1896 the year of lowest prices, while two make both years the same. The fall from 1893 to 1896 varies between 16 and 23 points, and the rise from 1896 to 1900 varies between 20 and 28 points. While all agree that the net changes between 1900 and 1904 were small, they disagree concerning the course from year to year. The extent of the rise from 1904 to 1907 is nearly the same in all series — 14 points in one, 15 in a second, and 16 in three ; but the extent of the fall in 1908 varies between 5 and 12 points, and the extent of the reaction in 1909 between 3 and 8 points. A more systematic comparison can be made by computing for each year the differences between some one series and the other four. The results of this operation, with the revised Bureau of Labor series as the standard of compar- ison, are shown in the second part of Table 9. The original series of the bureau is found to differ from the standard series by a trifle less than one point on the average, and in no year by more than three points. Next in closeness of agree- ment comes the improved Gibson series, then Bradstreet's, and last Dun's. In judging the importance of these differences, it is helpful to examine the corresponding differences between the various groups of relative prices which have been contrasted in the preceding tables. A list of the maximum differ- ences in any one year and the average differences for the whole period covered will suffice for the purpose (see Table 10). 15 Dun's sum for 3 890-99 is 842.9, which divided by 1,000 gives .843. Bradstreet's sum for 1892-99 is 54.23, which divided by 775.4 gives .06994. These quotients are the divisors used in the next table. To secure greater accuracy, the computations have been based on Dun's and Bradstreet's figures expressed in three digits, instead of in two as shown in the table. i« For Gibson's list of commodities see Norton's note cited above; for the Bureau of Labor's figures see Bulletin for March, 1910, p. 385; for the method of reducing the bureau's list of 250 commodities to 145 see footnote 8, above. MITCHELL: BUSINESS CYCLES 115 120 110 100 90 80 Chart 7 Comparison of Varioos American Index OF Prices at Wholesale.. Numbers |40 130 120 110 100 90 80 1890- 1910 ; > '" / Bureau of Labor -original. OuN- Gibson. Bradstreets. Gibson improved t "V ^7 / \ T / / V X /■ N« 1 1 : V i: ■^y • / y \, ■■V i / f >^ Y *1 ^ *' ^ A V' '/ 1890 '91 '92 "93 '94 '95 '9G "97 '98 '99 1900 'Ol 'o2 '03 '04 '05 '06 '07 '08 '09 1910 TABLE 9 SON OP Vabious American Index Numbers of Wholesale Prices. Bt Years Number of commodities 350-50 Dun- Gibson Original 96 Brad- street's Original 350-50 Dun- Gibson -H .843 96 Brad- street's -=- .06994 50 Gibson Improved 250 145 Bureau of Labor Year Original Revised 1890 92 109 114 113 114 1891 96 114 114 112 113 1892 90 7.8 107 111 105 106 106 1893 91 7.5 107 108 105 106 105 1894 83 6.7 99 96 94 96 96 1895 ■82 6.4 97 92 94 94 93 1896 74 5.9 88 85 87 90 89 1897 73 6.1 86 88 89 90 89 1898 78 6.6 92 94 95 93 93 1899 85 7.2 101 103 103 102 103 1900 91 7.9 108 113 112 110 111 1901 92 7.6 109 108 109 108 110 1902 102 7.9 121 113 116 113 114 1903 100 7.9 118 114 115 114 114 1904 97 7.9 115 113 116 113 114 1905 98 8.1 117 116 118 116 116 1906 105 8.4 125 120 123 123 122 1907 110 8.9 130 127 132 129 130 1908 106 8.0 125 115 125 123 121 1909 112 8.5 133 122 132 127 124 1910 115 9.0 137 129 135 132 131 1911 109 8.7 130 125 129 Averages 1890-99 84 7.0* 100 97* 100 100 100 1900-09 101 8.1 120 116 120 118 118 ■■ Average of 1892-99, 116 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE 9— (Concluded) Differences Between the Eevised Bureau of Labor Series and Other Index Numbers Number commodities Year 350-50 Dun- Gibson -^ .843 96 Brad- street's ■^ .06994 50 Gibson Improved 250 Bureau of Labor, Original 1890 —5 —1 1891 + 1 + 1 —1 1892 + 1 + 5 —1 1893 +2 +3 +1 1894 +3 —2 1895 +4 —1 +1 +1 1896 —1 —4 —2 +1 1897 —3 —1 +1 1898 —1 + 1 +2 1899 —2 —1 1900 —3 +2 +1 —1 1901 —1 —2 —1 —2 1902 —7 —1 +2 —1 1903 +4 + 1 1904 +1 —1 +2 —1 1905 + 1 + 2 1906 +3 —2 + 1 +1 1907 —3 +2 —1 1908 +4 —6 +4 +2 1909 +9 2 +8 +3 1910 +6 —2 +4 +1 Sums* 56 34 33 19 Maxima* 9 6 8 3 Averages* 2.8 1.9 1.7 1.0 TABLE 10 Maximum and Average Annual Differences Between the Series of Eelative Prices Shown in Tables 3-7 Maximum Average Character of relative prices compared differences differences Table 3. Foods at Eetail and Wholesale 11 4.5 Table 4. Consumers' and Producers' Goods 21 8.4 Table 5. Twenty Baw Materials and their Products 14 6.0 Table 6. Manufactured Consumers' and Producers' Goods — . 11 5.0 Table 7. Eaw Mineral and Forest Products 43 13.1 Table 7. Eaw Mineral and Animal Products 28 7.9 Table 7. Eaw Mineral and Farm Products 22 8.9 Table 7. Eaw Forest and Animal Products 35 12.9 Table 7. Eaw Forest and Farm Products 44 15.8 Table 7. Eaw Animal and Farm Products 16 6.4 MITCHELL: BUSINESS CYCLES 117 The differences shown by this schedule are all larger, many much larger, than any of those shown by Table 9. In other words, while general index numbers, when compiled from widely varying lists of commodities and made by unlike methods, differ somewhat from each other, their differences are much less than those which mark off the various parts of the system of prices. Further, the differences between the several index numbers are not arbi- trary. Most of them may be accounted for when the constitution of the series is known. For example, the differences between Dun's index for 1890-1906 and the standard series are partly due to the fact that the former gives prices on July 1 while the latter gives averages for the twelve months of the year. Accordingly, the extent of these differences is no ground for misgiving. Again, the larger proportion of raw materials and the smaller proportion of finished products explains the slightly greater sensitiveness of the revised in compar- ison with the original Bureau of Labor series. Similarly, the still greater sensitiveness of the improved Gibson series is due to its still greater proportion of raw materials. If we knew precisely what commodities entered into Brad- street's index, we could probably account for its idiosyncrasies in some similar fashion." The net result of this examination into the representative character of index numbers is reassuring. The table of decils shows that in every year the relative prices of cormnodities are dispersed over a wide range ; but it also shows that this dispersion is itself orderly and regular even in its changes. The compar- ison of five American index numbers shows that no two run exactly parallel; but it also shows that all agree regarding the general trend of fluctuations. Further, the differences of detail from year to year are found to be decidedly smaller than those between the various species into which prices have been divided in earlier sections. Finally, these relatively small differences are capable of explanation by differences in the material entering into the several index numbers, so far as that material is known. In comparing the index numbers for the United States, England, France, and Germany, then, average differences which exceed two or three points may be considered a safe indication of real divergencies in the course of prices. But in any single year wider deviations may be caused by technical differences in the method of making the several series. It is therefore desirable to sup- plement the comparisons between the standard series, by other comparisons between new index numbers made from the American, English, French, and German prices of identical lists of commodities.'' n Bradstreet's publishes regularly the prices of 106 commodities, but includes only 96 in its index number, without stating which 10 are omitted. Nor does it explain the system by which quotations by the yard, quart, gallon, square foot, thousand of brick, etc., are reduced to prices per pound. "Since this chapter was written, Mr. E. H. Hooker has published a paper comparing English, French, German, and American index numbers. "The Course of Prices at Home and Abroad, 1890-1910," Journal of the Royal Statistical Society, December, 1911. 118 MEMOIRS OP THE UNIVERSITY OP CALIPORNIA 9. The Fluctuations of Prices in the United States, England, France, and Germany Two excellent index numbers are currently published in England. The best known is that compiled by Mr. Augustus Sauerbeck, and for many years pub- lished in the March issue of the Journal of the Royal Statistical Society. It includes 45 commodities, mostly raw materials and slightly manufactured pro- ducts. The averages are arithmetic means of relative prices computed on the basis of average actual prices in 1867-77. No attempt is made to weight the several commodities in accordance with their importance beyond including two varieties for such articles as wheat, iron, and coal. For purposes of compar- ison with the American index numbers, Sauerbeck's figures have been recom- puted on the basis average actual prices in 1890-99 = 100." The second English series was begun by the Board of Trade in 1903, and has been continued in the Board of Trade Lahour Gazette:"' Like Sauerbeck, the Board of Trade includes 45 articles, but it selects an even larger proportion of raw materials in comparison with manufactured goods. Most of its actual prices are based on "import and export average values." The relative prices are computed on the basis of actual piices in 1900, and in making up the arith- metic means the relative prices of each commodity are weighted in accordance with its estimated consumption." In shifting this series to the American basis (average actual prices in 1890-99 = 100) I have contented myself with the rough and easy method of dividing the original results for each year by their average for 1890-99.=' For France, also, we have two valuable series. The first, designed by M. Lucien March, Chef de la Statistique Generale de la France, is based upon the prices set on 43 staple imports by the Commission des valeurs en douane. This list of commodities corresponds closely to Sauerbeck's list of 45. Originally the relative prices were computed on the basis of average actual prices in 1867-77;'" but as now published in the Anituaire statistique de France the series has been shifted to the basis of prices in 1891-1900." 18 In order to maintain strict continuity in the figures, I have not used the series which Sauerbeck drops or begins within this period, namely, the Cleveland quotations for pig-iron, English tough-cake copper aver- age import prices of hides and leather, and St. Petersburg tallow. In other respects the present figures are computed precisely like Sauerbeck's, save for the change of base. The disuse of these series does not alter the number of commodities included; for pig-iron, copper, hides, leather, and tallow are all represented by other continuous quotations in Sauerbeck's table. 20 See Report on Wholesale and Betail Prices in the United Kingdom in 190S, with Comparative Statistical Tables for a Series of Years (London, 1903). 21 See, for example. Twelfth Abstract of Labour Statistics of the United Kingdom, pp. 80-89. 22 No use is made of the London Economist's index number, because this pioneer effort to maintain a run- ning measure of price variations is distinctly inferior to its later rivals. Only 22 commodities are included and of these an unduly large proportion show the fluctuations of cotton, in raw or manufactured form. Rec- ognition of these long-standing defects has at last induced the Economist to revise its list. See the issue for February 4, 1911, p. 206. 23 Compare Bulletin de statistique et de legislation comparee, March, 1908, p. 340. 2-1 Annuaire statistique, 1908, p. 201*. For the list of articles included see ibid., pp. 84*-87*- MITCHELL: BUSINESS CYCLES 119 M. Jules Domergue is credited with planning the second French series, maintained by La reforme economique. The quotations are taken from interior markets, and include 48 commodities, of which 34 correspond to commodities in the lists of March and Sauerbeck. The relative prices are based upon actual prices in the single year 1890. In preparing these French series for comparison with the American series, I have applied the summary method of division to March's results; but recom- puted Domergue 's table in full on the basis of average actual prices in 1890-99. This discrimination in favor of Domergue 's series is justified by its superior claims as a representative of the French price level. The prices of foreign articles imported into a country are less significant for purposes of interna- tional comparison than the prices of both foreign and domestic articles obtained from interior markets.'^ The German material is less satisfactory than the English and French. Soetbeer's celebrated series has been allowed to lapse. The series based on the import values of 42 commodities at Hamburg, published in the Annuaire statis- tique de France,^" is open not only to the general objection against tables which quote none but imported articles, but also to a special suspicion. It represents prices as rising between 1900 and 1901, in the face of a serious business crisis, and at a time when the two series next described show a fall. Much superior is the index number computed by Otto Schmitz from the data for 29 commod- ities published by the Imperial Statistical Office. Schmitz 's book, Bewegung der Waarenpreise in BeutscUand, closes with 1902, but his series is now con- tinued in the statistical Beilage zur Zeitschrift filr Socialivissenschaft. Since the actual prices which Schmitz uses are not available for recent years, how- ever, the best way to secure an index number for Germany is to start afresh with the price data given by the Statistische JnhrMcher filr das Beiitsche Reich. Thirty commodities are regularly quoted here for the years 1890-1909, and the index numbers made from their prices bear a close relation to Schmitz 's series for 29 commodities." Of course, the new computations have been based upon average actual prices in 1890-99. The various foreign index numbers which have been described are assembled in Table 11, together with the best two American series. It will be seen from the second part of the table that the two French series agree almost as closely 25 By using all the commodities for which La reforme economique publishes complete series of actual prices since 1890 I have raised the number of articles in Domergue 's index number from 48 to 64. The chief ob- ject of this change is to include all the articles for which we have prices both m America and France. The enlarging of the list makes little difference in the results ■ ^t, i ^ v, 4.v. n M A de Foville has prepared a third index number for Prance by comparing the value set b;^ the Douane francaise on imports and exports, first at the prices of the preceding, and later at the prices of the current year Valuable as his results are, they serve the present purpose less well than the other French series, which are made by methods more nearly like those employed in computing the American and English mdex num- bers. For de Foville 's results see the Bulletin de statistique et de legislation compare, March, 1908, pp. 340, 341. 26 1908, p. 201*. . . .^, ^, 27 The commodities in the new index number include tue 28 articles listed below in connection with the table comparing the relative prices of identical commodities in the United States and Germany, and m addi- tion rape-seed oil (Danzig quotations) and hemp (Liibeck quotations). 120 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA as the American pair. But the Board of Trade's figures for English prices show a decidedly smaller rise in the second decade than do Sauerbeck's figures. Manipulation of the material entering into the averages shows that a small part of the difference can be accounted for by dissimilarity in the lists of com- modities and in methods of weighting.^^ But most of the difference is due to a dissimilar run of quotations for what purport to be the same commodities. Superficially, discrepancies traceable to the original data look suspicious. It must be remembered, however, that the Board of Trade takes most of its data from "import and export average values," while Sauerbeck takes most of his from market reports. Now, even with such staples as cotton and pig-iron, the imports and exports consist of several or many different grades, and the relative proportion of the high-priced and low-priced grades are subject to variation from year to year. Hence, while the average import and export prices may show accurately what prices England has paid for cotton per pound and received for pig-iron per ton, they do not show the prices of strictly uniform commodities. For some purposes the information concerning price fluctua- tions conveyed by the Board of Trade's figures is doubtless more useful than that conveyed by Sauerbeck's figures. But for comparison with index numbers for other countries made from market quotations, Sauerbeck's figures are certainly preferable. Consequently, the latter series is used in the following discussion.'" As between the two French and the two American series, it makes little difference which is used. But reasons have already been suggested for pre- ferring Domergue's to March's figures, and, since the improved Gibson series resembles the foreign index numbers rather closely, it may be preferred to the revised Bureau of Labor series for purposes of international comparison. In view of the demonstration that American index numbers compiled by different agencies from dissimilar materials yield substantially similar results, international comparisons based upon Gibson's, Sauerbeck's, Domergue's, and the new German series command no little confidence. Even the disagreement between the Sauerbeck and Board of Trade series is not seriously disconcert- ing, when its cause is known. But part of the differences shown in the second 28 For example, the Board of Trade makes the price level higher in 1890 than in 1900, while Sauerbeck makes it lower. (1) To determine what part of the difference is due to dissimilarity in the lists of commod- ities, I have computed several averages for the 30 commodities included in both lists, for the 15 included by the Board of Trade and not by Sauerbeck, and for the 15 included by Sauerbeck and not by the Board of Trade. The results show that neither series would be altered more than one point by omitting the com- modities not included in the other. Such an omission would raise Sauerbeck's results a trifle and reduce the Board of Trade's, thus bringing the two averages for 1890 a little closer together. (2) To determine the effects of weighting on the Board of Trade's averages, I have computed a simple arithmetic mean of its 45 relative prices for 1890, and obtained 102.3 in place of 104.0. But after both of these changes have been made the Board of Trade's figures still show a higher range of prices in 1890 than in 1900, and Sauerbeck's figures still show a lower range. 29 There may be other reasons for the peculiarities of the British Board of Trade series which one familiar with the precise method of computing "import and export average values" could point out. The close agreement between the French import figures and Domergue's market prices shows that in some cases the two sources of data give substantially similar results. MITCHELL: BUSINESS CYCLES 121 1830 '31 "32 '93 "94 '35 '36 '97 '38 "99 1900 "01 '02 '03 '04 '05 '06 '07 '08 '09 1310 TABLE 11 CoMrARisoN OP American, Engmsh, French, and German Index Numbers of Prices at Wholesale. By Yeaes, 1890-1910 Average actual prices in 1890-99 = 100 American English French .German Number of , "^ ^ r -^ \ i * \ r * ^ commodities 145 50 45 45 43 64 30 Bureau of Gibson, Board Domergue, New Year Labor, revised improved Sauerbeck of Trade March revised series 1890 114 114 109 108 111 109 113 1891 113 114 109 112 109 108 111 1892 106 105 103 106 106 102 102 1893 105 105 103 104 104 105 99 1894 96 94 95 98 96 97 91 1895 93 94 94 94 94 94 92 1896 89 87 92 92 91 91 92 1897 89 89 93 94 92 91 94 1898 93 95 97 97 95 97 100 1899 103 103 104 96 103 106 106 1900 111 112 115 104 110 114 113 1901 110 109 107 101 105 107 108 1902 114 116 106 100 103 106 106 1903 114 115 106 101 104 107 106 1904 114 116 108 102 103 106 105 1905 116 118 111 101 109 107 113 1906 122 123 119 104 116 117 121 1907 130 132 123 110 119 126 129 1908 121 125 112 107 114 112 121 1909 124 132 114 108 113 119 1910 131 135 120 113* 122 122 Averages 1890-99 100 100 100 100 100 100 100 1900-09 118 120 112 104 112 114 * Provisional, subject to revision. • 122 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA TABLE 11 — {Cojicuded) DiFrERENCES AMONG THE SEVERAL SERIES Differences between Differences between the Differences between Gibson's improved series for America and Sauerbeck's series for England and Differences between Domergue's Fear Two American series Two English series 'Two French series Sauerbeck's English series Domergue's French series New German series Domergue's New French German series series French series and New German series 1890 + 1 — 2 + 5 + 5 + 1 —4 —4 1891 — 1 — 3 — 1 + 5 + 6 + 3 + 1 -2 —3 1892 + 1 — 3 — 4 + 2 + 3 + 3 +1 +1 1893 — 1 + 1 + 2 + 6 —2 +4 +6 1894 + 2 — 3 + 1 — 1 — 3 + 3 —2 +4 +6 1895 — 1 + 2 +2 +2 1896 + 2 — 5 — 4 — 5 + 1 o" —1 1897 — 1 — 1 — 4 — 2 — 5 +2 -1 —3 1898 — 2 + 2 — 2 — 2 — 5 —3 —3 1899 + 8 + 3 — 1 — 3 — 3 —2 —2 1900 — 1 + 11 + 4 — 3 — 2 — 1 + 1 +2 + 1 1901 + 1 + 6 + 2 + 2 + 2 + 1 —1 —1 1902 — 2 + 6 + 3 + 10 + 10 + 10 1903 — 1 + 5 + 3 + 9 + 8 + 9 —1 +1 1904 — 2 + 6 + 3 + 8 +10 + 11 +2 +3 +1 1905 — 2 + 10 — O + 7 +11 + 5 +4 —2 —6 1906 — 1 +15 + 1 + 4 + 6 + 2 +2 —2 —4 1907 — 2 + 13 + 7 + 9 + 6 + 3 —3 —6 —3 1908 — 4 + 5 — 2 + 13 + 13 + 4 —9 —9 1909 — 8 + 6 + 18 +19 + 13 +1 —5 —6 1910 — 4 + 7 +15 + 13 +13 —2 —2 Sums* 33 103 42 110 115 ] 95 25 53 60 Maxima* 8 15 7 18 19 13 4 9 9 Averages 1.7 5.2 2.2 5.5 5.8 4.8 1.3 2.7 3.0 * 1890-1909. part of Table 11 between the figures chosen to represent the United States, England, France, and Germanj^ must be ascribed to dissimilarity in the several lists of commodities. The comparisons will therefore be still more satisfactory if this source of disagreement can be reduced to negligible proportions. For- tunately, Sauerbeck gives the actual prices of 34 commodities which are also quoted by the Bureau of Labor. Similarly, La reforme economique reports the prices of 43, and the Statistische Jahrhilcher fiir das Deutsche Reich report the prices of 28 articles for which the Bureau of Labor provides American data. MITCHELL: BUSINESS CYCLES 123 From this material Table 12 has been made, to show the average relative prices of substantially identical commodities in the United States, on the one hand, and on the other hand, in the three European countries.^" In all four countries, the movements of prices at wholesale have been the same in their larger phases. The decline from 1890 to 1894-96, the rise from the latter years to 1900, the reaction in 1901, the comparative stability in 1902- 04, the renewed advance in 1904-07, and the sharp fall in 1908, are found alike in the United States and England, in Prance and in Germany. 30 The commodities included in the three lists are as follows. The descriptions are intended only to enable anyone who so desires to identify the precise materials selected from each source. 1. The United States and England English Commodities 1. Wheat: American. 2. Flour: Town-made white. 3. Barley: English Gazette. 4. Oats: English Gazette. 5. Maize: American mixed. 6. Potatoes: Good English. 7. Eice: Rangoon cargoes to arrive. 8. Beef: Prime, by the carcass. 9. Beef: Middling by the carcass. 10. Mutton: Prime by the carcass. 11. Mutton: Middling by the carcass. 12. Pork: Large and small, average, by the carcass. 13. Bacon: Waterford. 14. Butter: Priesland, fine to finest. 15. Sugar: British West Indian refinery. 16. Coffee: Eio, Good Channel. 17. Tea: Congon, Common. 18. Iron: Scotch pig. 19. Iron: Bars, common. 20. Copper: Chile, bars. 21. Tin: Straits. 22. Lead: English pig. 23. Coal: Average export price. 24. Cotton: Middling American. 25. Jute: Good medium. 26. Wool: English, Lincoln Half Hogs. 27. Silk: Tratlee. 28. Hides: Eiver Plate, Salted. 29. Leather: Crop hides. 30. Tallow: Town. 31. Oil: Linseed. 32. Seeds: Linseeds. 33. Petroleum: Eefined. 34. Soda: Crystals. American Commodities "Contract: contract grades, cash." Av. ' ' spring patents ' ' and ' ' winter straights. ' ' "By sample." "Oats: cash." "Corn: No. 2, cash." "Burbank." "Domestic, choice." Cattle steers, choice to extra. ' ' Fresh native sides. ' ' Sheep wethers, plain to choice. ' ' Mutton, dressed. ' ' Hogs: average. Av. of ' ' short clear sides ' ' and ' ' short rib sides. ' ' ' ' Creamery, extra, N. Y. market. ' ' "89° fair refining." "Eio, no. 7." "Formosa, fine." "Pig-iron." "Foundry, no. 1." "Bar iron: best refined." Av. "From Mill" and "From Store." "Ingot, lake." "Tin: pig." "Lead: pig." ' ' Bituminous. ' ' Av. of 3 series. "Upland, middling." "Eaw." "Ohio, medium fieece. " "Eaw: Japan filatures." "Hides: green salted; heavy native steers." ' ' Harness, oak. ' ' "Tallow." "Linseed oil, raw." "Flaxseed, no. 1." "Eefined for export." "Bicarbonate of, American." 2. The United States and Fkance 10. 11. 12. 13. 14. 15. French Commodities Wheat: Ble cote ofiieiell. Flour: Parine fleur. Bread: Pain, Taxe official a Paris. Barley: Orge, marche libre. Oats: Avoine, cote officiell. Corn: Mais, mixed d'Amerique. Eye: Seigle, cote officiell. Eice: Eiz, rangoon. Starch: Fecules. Hay: Foin. Beef: Boeuf, Halles central. Mutton: Mouton, Halles central. Pork: Pore, Halles central. Lard: Saindoux, Americain. Butter: Beurre, moyen. American Commodities Wheat, cash. Flour, wheat, average. Bread, loaf, average. Barley, by sample. Oats, cash. Corn, cash. Eye, no. 2 cash. Eice, domestic choice. Starch, pure ciorn. Hay, timothy no. 1. Beef, fresh native sides N. Y. Mutton dressed. Hogs, average. Lard, prime contract. Butter, average. 124 MEMOIRS OP THE UNIVERSITY OP CALIFORNIA But in degree and occasionally in direction of movement numerous differ- ences appear. The closest agreement is that between England and Prance. Indeed, both Sauerbeck's and Domergue's series in Table 11 and the English and French series in Table 12 accord more perfectly than do the two American, two English, or two French series. The wider discrepancy between the English and French series which appeared in 1910 was probably caused by the bad French harvests in that year. 16. 17, 18, 19, 20, 21. 22. 23. 24. 25. 26. 27. 28. -29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 9. 10. 11. 12, 13. 14. 15. 16, 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. Sugar: toucre, buit, Eoux. Sugar: Sucre raffiuS, Ire qualite. Coflfee: Gates sautos. Iron: Pars marcliands. Copper: Cuivre (ling) et plaques de laminage. Copper: Cuivre (Barres) ordinaire. Tin: Etain banka. Lead: Plomb (m. ord.) livrable a Paris. Zinc: Zinc de Selesie. Steel: Acier, rails. Coal: Charbou du nord, TV 20 a 25% sur bateau. Cotton: Coton tres ord. au Havre. Cotton: Av. of "Coton chaine 28 ord." and "Coton trame 37 ord." Cotton: Coton, tissu 90 cm. 68 port. 20 fils. Jute: Jute. Wool: Laine peignee, typel, Eoub. Tour. Wool: Av. of "Mis de laine peignee chaine 40-56 mm. and ' ' Ills de laine, trame 60 c. 50/84 mm. ' ' Linen: Fil de lin no. 20. Silk: Soie greges, Italic 2e ord 10/12. Hides: Boeuf, cuirs bruts. Rubber: Caoutchouc, march^ d'Anvers. Tallow: Suifs, Paris. Oil: Huile, lin. Alcohol: Alcool, 3/6 nord. Glycerin: Glycerine brut, 28°. Chemicals: Produits ehemiques: sulfurique aeide 66°. Petroleum: Petrole amerieain. Lime: Produits ehemiques: chlorure de chaux 105/110. Sugar, 89° fair refining. Sugar, granulated. Coffee, Eio no. 7. Bar iron, from store, Philadelphia market. Copper sheet, hot-rolled (base sizes). Copper, ingot. Tin pig. Lead pig. Spelter western. Steel rails. Coal, bituminous Pittsburg. Cotton, upland middling. Cotton yarns, average. Sheetings, average. Jute, raw. Wool, average. Worsted yarns, average. Linen shoe thread 105, Barbour. Silk, raw Italian classical. Hides, green salted, packers' heavy native steers. Rubber, Para Island. Tallow. Linseed oil, raw. Alcohol, grain. Glycerin, refined. Sulphuric acid, 66°. Petroleum refined for export. Lime, common. 3. The United States and Germany German Commodities Weizen, Miinchen. Weizenmehl, Danzig. Roggen, Miinchen. Roggenmehl, Danzig. Gerste, Miinchen. Hafer, Miinchen. Reis, Bremen. Rohzucker, Magdeburg. RaflSnade, Magdeburg. Kaffee, Bremen. Kartoffelspiritus, Hamburg. Rohtabak (Kentucky), Bremen. Rindvieh, Berlin. Hammel, Berlin. Schweine, Berlin. Sehmalz, Bremen. Heringe (Norweg.), Stettin. Roheisen (Giesserei-), Breslau. Kupfer, Frankfurt a. M. Blei, Berlin. Zinn, Hamburg. Zink, Breslau. Steinkohlen (niederschles.), Breslau. Steinkohlen (Puddel-), Dortmund. Petroleum, Hamburg. Baumwolle, Hamburg. Wolle, Berlin. Rohseide (Organs.) Krefeld. American Commodities Wheat, cash. Flour, wheat, average. Eye, no. 2, cash. Flour, rye. Barley. Oats, cash. Rice. Sugar, 89° fair refining. Sugar, granulated. Coffee. Proof spirits. Tobacco, plug. Cattle, average. Sheep, average. Hogs, average. Lard, prime contract. Fish, herring. Pig-iron, foundry, no. 2. Copper, ingot. Lead, pig. Tin, pig. Zinc, sheet. Coal, bituminous, Georges Creek, f . o. b., N. Y. Coal, bituminous, Pittsburg. Petroleum, refined, for export. Cotton. Wool, average. Silk, raw, Italian classical. MITCHELL: BUSINESS CYCLES 125 CHART 9 . Relative Prices at Wholesale of 34 Commodities IN THE United States and England. 140 1890-1910. / 130 / IZO 110 100 90 ENGLAND / V- / 120 110 100 ^0 - \ / \ / t \ \ \ / / / / w k \ / 1/ \ ■-<-, — — / ^~^. \ \ ^:^s» \ / (^ y 80 \ / m 1890 '91 '92 '33 '94 '95 '96 '97 "98 '99 1900 'oi '02 to '04 'o5 '06 '07 'Og '09 1910 CHART 10. Relative Prices at wholesale of 43 Commodities 140 in the United States and France 1890- 1910. ■- 1 A 1 / 150 /. \ / 1 120 1.0 100 France y / — / 1 -I — 120 no 100 so \ / V y ^ y y 1 ' 1 1 1 1 1 ,''' '•»^. \ > \ **•*' V / ,7 ^■»., .^'' — y N :::>^ S^- .''' '7 ■1 yo 80 \ — / 80 1890 61 '92 '93 '94 '95 '96 '91 '98 '99 1900 'Ol '02 '03 '04 '05 Ot 'OT 08 09 1910 126 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA CHART II Relative Prices at Wholesale of as Commodities 140 IN THE United States and Germany I89O-I9I0 / V- — y ^ no UNITED STATES GERMANY y ^''\^ / 120 /: \ ."' lao X 1 / '■■- v^ — 110 roo 90 ^ \ \ / ^ / / no 100 90 BO \\ \\ V I J / \ — / \ \ \\ \\ \\ \\ V \-- _^*»' A / eo N ^ / 1 1890 '9 92 '93 '94 '95 '96 '97 '98 "99 1900 "01 "OE" '03 '04 '05 '06 07 '08 'OS 1910 TABLE 12 Index Numbers tor Identical Lists of Commodities at Wholesale in the United States and England, the United States and Prance, and the United States and Germany. By Years, 1890-1910 Average actual prices in 1890-99 ^ 100 No of United States and England United States and France United States and Germany commodit Year 1890 es 34 United States 115 34 England 109 43 United States 114 43 France 110 28 United States 114 28 ' Germany 113 1891 116 110 114 108 117 112 1892 106 104 107 102 105 103 1893 106 102 104 104 104 99 1894 96 94 94 96 92 91 1895 94 94 93 93 92 91 1896 83 92 87 91 86 91 1897 87 93 88 93 88 93 1898 94 97 94 97 95 99 1899 103 105 105 106 106 106 1900 111 117 111 113 112 112 1901 111 108 110 106 110 107 1902 119 106 113 104 116 106 1903 113 106 113 107 117 106 1904 112 107 114 106 117 ,105 1905 114 111 117 109 120 113 1906 121 119 122 119 124 122 1907 128 124 130 126 134 128 1908 122 113 122 113 126 120 1909 129 114 129 116 131 119 1910 135 121 136 127 133 122 Averages 1900-09 118 113 118 100 100 100 1890-99 100 100 100 112 121 114 MITCHELL: BUSINESS CYCLES 127 TABLE 12— (Concluded) Differences Among the Several Series Differences between the' 1st and 2d American Year series 1890 + 1 1st and 3d American series + 1 2d and 3d American series English and French series — 1 English and German series — 4 French and German series — 3 American and English series + 6 American and French series + 4 American and German series + 1 1891 + 2 — 1 — 3 + 2 — 2 — 4 + 6 + 6 + 5 1892 — 1 + 1 + 2 + 2 + 1 — 1 + 2 + 5 + 2 1893 + 2 + 2 — 2 + 3 + 5 + 4 + 5 1894 + 2 + 4 + 2 — 2 + 3 + 5 + 2 — 2 + 1 1895 + 1 + 2 + 1 + 1 + 3 + 2 + 1 1896 — 4 — 3 + 1 + 1 + 1 — 9 — 4 — 5 1897 — 1 — 1 — 6 — 5 — 5 1898 — 1 — 1 — 2 — 2 — 3 — 3 — 4 1899 — 2 — 3 — 1 — 1 — 1 — 2 — 1 1900 — 1 — 1 + 4 + 5 + 1 — 6 — 2 1901 + 1 + 1 + 2 + 1 — 1 + 3 + 4 + 3 1902 + 6 + 3 — 3 + 2 — 2 ■ +13 + 9 +10 1903 — 4 — 4 — 1 + 1 + 7 + 6 +11 1904 — 2 — 5 — 3 + 1 + 2 + 1 + 5 + 8 + 12 1905 — 3 — 6 — 3 + 2 2 — 4 + 3 + 8 + 7 1906 — 1 — 3 — 2 — 3 — 3 + 2 + 3 + 2 1907 — 2 — 6 — 4 — 2 — 4 — 2 + 4 + 4 + 6 1908 — 4 — 4 — 7 — 7 + 9 + 9 + 6 1909 — 2 — 2 — 2 — 5 — 3 +15 +13 +12 1910 — 1 + 2 + 3 — 6 — 1 + 5 +14 + 9 +11 Sums* 31 54 37 28 49 47 107 96 98 Maxima* 6 6 4 4 7 7 15 13 12 Averages* 1.6 2.7 1.9 1.4 2.5 2.4 5.4 4.8 4.9 * 1890-1909. Between Germany on the one hand and England and France on the other hand, somewhat wider differences appear in both tables. (1) Prices fell faster in Germany from 1890 to 1894 than in its neighbors, but arrested their decline somewhat earlier. (2) Prom 3894 to 1896 the German price level was substan- tially stable, while the English and French levels continued to sag. (3) The advance in 1904-07 was distinctly greater in Germany, and (4) the fall in 1907- 08 was distinctly less, but (5) it continued in 1908-09 when both French and English prices turned upward. On the Avhole, during this period of twenty years, the German price level has fluctuated through a slightly wider range than the English or French. Much more marked are the differences between price fluctuations in the three European countries and in the United States. The improved Gibson series differs from Sauerbeck's, Domergue's and the new German series by nearly twice the margins found between any of the last three. Even more 128 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA striking is the evidence afforded by Table 12. Here the three American index numbers, of dissimilar constitution, show almost exactly the same total, maxi- mum, and average differences among themselves as do the three European index numbers, also of dissimilar constitution. But when comparison is made between the three pairs of similarly constituted index numbers for the United States and the European countries, the total, maximum, and average differences are found to be more than twice as great as in the former cases. These results concerning the fluctuations of prices at wholesale accord perfectly with the results reached in the chapter upon the annals of business. There it was found that while business cycles have pursued broadly similar courses in America and Europe, the differences between their courses in the United States and in the three European countries have been much wider than the corresponding differences among their coiirses in England, France, and Germany. Now it appears that the l3road agreement and the differences in detail between the courses of business cycles have been accompanied by strik- ingly similar agreements and differences in the movements of wholesale prices. The United States again is found to be less closely tied by economic bonds to Europe than the three European countries are tied to each other. In 1890 the wholesale price level stood relatively higher in America than in Europe, and this position it maintained until 1893. But the severe crisis of that year in America was felt only as an aggravation of the depression ruling in Europe. Accordingly, American prices fell far more rapidly than European prices in 1893-96, and reached a relatively lower level. The tardiness with which America recuperated from depression prevented American prices from catching up with the European level until after 1900. But since the crisis of that year was much less severe on this than on the other side of the Atlantic, the fall of American prices in 1900-01 lagged behind the European fall. More- over, the prompt return of prosperity in America, while Europe continued to suffer business depression, brought with it a rise of prices in America while prices continued to sag in Europe. Thus the American price level became relatively higher than the European — a position which it has held ever since. America's lead was cut down by the more rapid rise of European prices in 1904-06, and increased again hj the more rapid rise of American prices in 1906-07. Finally, the fall of prices after the crisis of 1907 was slighter in America and the rise in 1909 was much more marked. At the end of the period, therefore, the difference between the American and European price levels was greater than at any previous time covered by the tables. The fact that the United States had become relatively the worst country in which to buy and relatively the best country in which to sell may have had something to do with making 1910 a year of contraction in American business, while it was a year of rapid expansion in the business of England and Germany. But consider- ation of such questions belongs to a later stage of the investigation. MITCHELL: BUSINESS CYCLES 129 The materials for an international comparison of retail price movements are less satisfactory. The British Board of Trade publishes a weighted index number of the retail prices of 23 foods in London which now covers the years 1895-1910.^' This service can be pieced back to 1890 by the aid of an experi- mental series compiled by Mr. George H. Wood.'' With this rather dubious retail index number may be compared Sauerbeck's figures for the relative prices of 19 foods at wholesale. For Prance, M. Lucien March has recently published a table showing the retail prices charged by a railway economat in Paris. Among the 52 commodities in his list there are 36 articles of food for which actual prices are given in every year from 1890 to 1910.'" A wholesale series for food prices in France can be made from data for the 23 articles of food TABLE 13 Relative Peices of Foods at Retail and Wholesale in the United States, England, and Prance. By Years, 1890-1910 A-i r'erage actual prices in 1890 1-99 = :100 XT.._ivn_ ^e At retail A United States A England France A JNumDer oi r commodities 30 United Year States 23 England 36 France 30 At retail 54 At wholesale 23 At retail 19 At wholesale 36 At retail 23 At wholesale 1890 102 104 103 102 112 104 107 103 106 1891 103 105 105 103 116 105 112 105 112 1892 102 105 104 102 104 105 107 104 105 1893 104 101 107 104 110 101 105 107 107 1894 100 99 102 100 100 99 96 102 101 1895 98 95 99 98 95 95 93 99 94 1896 96 93 97 96 84 93 91 97 87 1897 96 98 91 96 88 98 95 91 91 1898 98 102 95 98 94 102 99 95 100 1899 100 98 96 100 98 98 95 96 97 1900 102 101 95 102 104 101 101 95 98 1901 105 103 96 105 106 103 98 96 96 1902 111 103 95 111 111 103 98 95 97 1903 111 105 95 111 107 105 96 95 99 1904 112 106 96 112 107 106 99 96 97 1905 113 105 97 113 109 105 101 97 97 1906 116 105 101 116 113 105 101 101 99 1907 121 107 103 121 118 107 105 103 109 1908 110 105 121 110 105 105 101 1909 110 100 125 110 107 100 101 1910 112 102 129 112 111 102 107 Averages 1890-99 100 100 100 100 100 100 100 100 100 1900-09 106 98 112 106 101 98 99 31 Board of Trade Labour Gazette, January, 1911, p. 4. 32 "Real Waees and the Standard of Comfort since 1850," Journal of the Boyal Statistical Society March, 1909 especially pp. 94, 95, and 103. Wood's figures for 1890-94 have been shifted from the basis of prices in 1850 to the Board of Trade's basis of prices in 1900; and then the combined series has been shifted to the basis of average prices in 1890-99. . ,, ^ 7 j t 33 "Influence des variations des prix sur le mouvement des depenses menageres ^ Pans, Journal de la Societe de Statistique de Paris, April, 1910, pp. 162-163. In computing the index number m Table 13, the average of the relative prices of three kinds of sugar was used. 130 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA quoted by La reforms economique.^* No systematic German material of suffi- cient extent to justify the computation of an index number is available/' Since the commodities included in the above retail and wholesale lists for England and Prance differ, the American series selected for comparison are the Bureau of Labor's simple averages for 30 foods at retail and 54 foods at wholesale/" A minute comparison of series so lacking in uniformity as the foregoing would be out of place. But certain broad conclusions suggested by the table may be trusted. (1) Retail prices in all three countries have held a more even course than wholesale prices, rising less during prosperity, and falling still less during depression. But even the wholesale prices of foods do not reflect the course of business cycles with accuracy, because they consist almost wholly of organic goods." (2) In the United States and England relative prices at retail were lower than relative prices at wholesale in 1890, and higher in 1907-10. This change has come about gradually because the lagging of retail prices behind wholesale is more pronounced upon the fall than upon the rise. (3) The advance of food prices during the second decade was distinctly greater in the United States than in England or Prance. II. The Peices of Labor — Wages 1. The American Data Por measuring changes from year to year in the prices paid for labor, the largest collection of data is that published by the United States Bureau of Labor in its Bulletins of July, 1904-08.'^ The returns for 1907, for example, show the wages per hour received by 351 ,000 persons, following 333 occupations in 4,169 establishments. But extensive as this material is, it still falls far short of representing the prices of all important kinds of labor. Practically all the establishments from which pay-rolls are obtained are engaged in some line of manufacturing. But such great branches of employment as farming, railroad- ing, mining, lumbering, general contracting, salesmanship, and clerical work are not covered. Thus the information concerning the prices of labor, like that concerning the prices of conunodities, consists of samples, drawn from a limited field, and offered as representatives of a vastly larger munber of prices. Por present purposes, however, it is fortunate that manufacturing is the field best covered ; for, as has been pointed out, industrial centers exhibit the phenomena of business cycles in pronounced degree.^" 34 Starch, butter, coflfee, coooa, soda, pork, beef, mutton, veal, oats, barley, rye, rice, corn, wheat, flour, bread, lard, tallow, sugar (raw and refined), syrup, wine. 35 The Statistisches JaJirhucJi fur das Deutsche Reich gives the ' ' market prices ' ' for five or six staples. 36 Bulletin of the Bureau of Labor, July, 1908, p. 195. 37 Compare section 6, above. 38 See also the Bureau 's Nineteenth Annual Report. 30 See Chapter II, ii, 1. MITCHELL : BUSINESS CYCLES 131 But, even as a representative of wages in manufacturing industries, the Bureau of Labor's results have been questioned. For they have seemed to disagree with the results of an investigation into wages in 1890 and 1900 made by the Census Office. While the Bureau of Labor found that relative wages per hour advanced from 100.3 in 1890 to 105.5 in 1900, Professor Davis R. Dewey's census report on Employees and Wages indicated that the cases in which wages had been reduced between these two years were not less numerous than the cases in which wages had been raised. The rather vague impression of a discrepancy left by Professor Dewey's textual summaries was rendered definite in 1907 by Professor Henry L. Moore's paper on "The Variability of Wages."*" Basing his work on Dewey's data, Moore computed the average rate of wages in thirty selected industries in 1890 and 1900, and found that relative wages had declined from 100.0 to 99.6. While neither of these careful investigators called attention to the variance of their results from those of the Bureau of Labor, or sought to criticize the latter, others were less cautious. For three or four years it was generally thought that the bureau's figures exaggerate the rise of wages by several points. Close comparison between Professor Moore's and the bureau's tables, how- ever, shows that the apparent discrepancy is due almost wholly to differences in scope and method of construction.*^ When these differences are eliminated and the bureau's data are worked up by Moore's methods, they yield relative wages of 100.0 in 1890, and 100.3 in 1900 — figures which are almost the same as Moore's relative wages of 100.0 and 99.6. Clearly, therefore, there is no ground for distrusting the bureau's original data. Their trustworthiness is confirmed, not discredited, by proper comparison with the data gathered by Professor Dewey for the Census Office. But the question remains whether the bureau's methods of computing index numbers — ^methods which show a considerable advance in wages between 1890 and 1900, — or Moore's methods, which reduce this advance almost to zero, are to be preferred. Professor Moore's primary object was to measure the varia- bility of wages at two different dates, and he adapted his methods to this end. The bureau, on the contrary, aimed to measure the average change of wages from one year to the next, and chose its means accordingly. Each set of methods, therefore, has its justification. But the bureau's set is preferable for the present purpose, because this purpose is substantially that which the io Political Science Quarterly, March, 1907, pp. 61-73. 41 In detail these differences are as follows: Moore took wages per week, the bureau wages per hour; Moore excluded females the bureau included them; Moore covered 30 industries, the bureau (m its Nineteenth Annual Report) covered 56; Moore weighted his figures by actual numbers employed, the bureau did not weight its figures for different occupations in striking averages for each industry, but did weight its figures for different industries in striking grand averages; finally, Moore computed averages m one way, the bureau in another. Moore began by tabulating the number of men receiving $2-3 a week, $3-4, $4-5, and so on. Then he multiplied the mean wage in each of these groups ($2.50, $3.50, $4.50) by the corresponding num- ber of employees To find the average actual wages, he divided the sums of these products by the total number of men represented, and then turned the average actual wages into percentages. The bureau, on the other hand turned its actual wages per hour into percentages at the outset and then made arithmetic means from these percentages by the curious combination of simple and weighted averaging which has been stated. 132 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA bureau had in view. That is, we need a measure of the average change in the prices of labor comparable with the preceding measures of average change in the prices of commodities. In one respect, however, the bureau 's methods of analysis may be improved. Each occupation should be weighted by the number of persons engaged in fol- lowing it, instead of being treated as having the same importance as other occupations followed by many less or many more people.*' In practice this change proves to make little difference in the results ; but it has been adopted in constructing such of the following tables as are new. The numbers used in weighting each series are obtained by first giving every industry a weight proportionate to the number of wage-earners engaged in it according to the manufacturing census of 1900, and, second, dividing the weight for every industry among its several occupations in accordance with the average number of persons reported by the Bureau of Labor as employed in the decade 1890-99.*' 2. The Prices of Labor in American Manufacturing Industries The bureau's grand average and its results for eleven industries employing over 100,000 persons according to the census of 1900 are reproduced in the next table.** The figures indicate that the prices of labor are influenced by changes in business conditions, but in less measure than the prices of commodities, even at retail. The general average declines after the panic of 1893, recovers in 1896, advances in 1898-1903, makes very little gain in the dull year 1904, and then rises rapidly again in 1904-07. But the degree of rise and fall is consid- erably less than that of commodities at wholesale, and just about the same as that of foods at retail (see Chart 13). On examining the figures for separate industries, one finds that there is less variety of fiuctuation than in commodity markets. But still considerable differences appear between, say, cotton mills and foundries, or building trades and shoe factories. However, no industry escaped a reduction of wages after 1893, and none failed to register a large advance between 1894 and 1907. In making Table 15, the series have been classified, not by industries, but by sex and rates of pay in 1890-99. The new system of weighting, spoken of above, has been introduced into this compilation; but the final results do not differ from those of the Bureau of Labor by more than one point in any year. Female wage-earners are shown to have received a greater relative increase of pay than any group of men represented by the table. This result may be due to the fact that nearly a quarter of the women represented by the data were employed in the cotton industry, where, according to Table 14, the ■»= For the bureau's method of weighting its series see the preceding footnote. is The topic of this section is discussed at greater length in "The Trustworthiness of the Bureau of Labor's Index Number oi Wages," Quarterly Journal of Economics, May, 1911, pp. 613-620. *i Compiled from Bulletin of the Bureau of Labor, July, 1808, Table III, pp. 126-132. MITCHELL: BUSINESS CYCLES 133 ThouB. of employees 3813 TABLE 14 Eelative Wages per Hoint in Selected Manufacturing Industries of the By Years, 1890-1907 Arithmetic means. Average actual wages per hour in 1890-99 = 143 374 Year 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 Average of 41 Boots Building industries and shoes trades 100 100 101 101 98 98 100 100 100 102 106 108 112 116 117 119 124 129 98 96 98 101 100 101 101 103 102 102 105 105 109 116 117 118 120 124 218 191 Car building, Clothing, steam factory railroad product 97 98 100 100 98 98 100 101 103 105 110 115 121 127 130 132 140 145 103 102 102 104 98 98 98 98 98 100 101 102 106 112 116 115 119 124 100 100 100 100 97 99 100 100 102 103 103 107 103 106 110 111 115 116 308 Cotton goods 103 99 100 104 97 97 105 101 97 97 109 110 116 123 120 126 140 158 350 100 222 Foundry and machine Iron shop Furniture and steel* United States. 100 283 103 99 100 103 102 99 99 101 100 99 99 102 105 108 112 114 114 118 121 99 102 103 101 99 97 98 100 99 103 103 110 117 118 120 122 126 127 109 109 106 102 93 95 97 93 93 103 111 114 122 128 117 121 128 131 Lumber 103 102 102 102 98 97 97 97 99 102 104 107 110 113 114 118 124 128 Tobacco, cigars 100 101 100 100 99 97 99 102 101 101 101 113 110 117 119 121 131 132 126 Woolen and worsted goods 98 99 100 102 97 97 101 100 103 104 110 111 114 115 116 118 124 132 *" Mean of Bar iron, Bessemer converting, and Blast furnaces. advance of wages has been especially rapid ; or the rapid advance of wages in the cotton industry may be due to the fact that higher rates have been demanded by women and girls. Among men, the highest priced workers have secured the most rapid increase in pay, and the lowest priced the least rapid. Perhaps these differences are connected with differences in the scope and efficiency of trade-union organization among wage-earners on the higher and lower planes. Finally, the scope and distribution of divergences from the general trend of wage changes are set forth in Table 16. That the range covered hj the relative prices of labor is narrower and the degree of concentration around the median is greater than with wholesale commodity prices, appears on comparing these decils with those of Table 8. The average margins between the deeils run as follows in number of points: Wages Wholesale prices .... "3 '2 23.1 32.5 2.3 7.6 1.4 5.2 4.2 CO 00 05 1.1 1.1 1.4 1.8 3.0 41.4 3.6 3.9 4.4 5.8 12.2 54.7 134 MEMOIES OF THE UNIVERSITY OF CALIFORNIA This table shows also that the very deviations from the general trend of fluctuations are regular and orderlj^ in the case of prices of labor as in the case of prices of commodities. For each one of the decils undergoes changes strik- ingly similar in character to the changes undergone by the median, or by the arithmetic mean of Table 15. Finally, the decreased margins between the decils in 1894-96 and the increased margins in later years show that relative wages, like relative prices, are squeezed together by the pressure of business depression and spring apart when this pressure is relaxed by the return of prosperity. ■'' TABLE 15 Relative Wages per Hour of Employees in Forty-one Manufacturing Industries, Classified According to Sex and Average Actual Wages per Hour in 1890-99. By Years, 1890-1907 Arithmetic means, weighted by numbers employed in each occupation and each industry. Average actual wages per hour in 1890-99 : = 100 Females A Males Both sexes A Proportionate numbers 1895 Nearly all less than 20c Year per hour 3305 Less than 20c per hour 3902 20-34. 99c per hour 898 35c per hour upward 8105 All rates of pay 10,000 New results Bureau of Labor 1890 99 102 100 100 101 101 100 1891 100 102 100 101 101 101 100 1892 100 102 101 101 101 101 101 ]893 102 102 101 101 101 101 101 1894 99 97 98 98 98 98 98 1895 98 98 99 97 98 98 98 1896 102 99 99 99 99 100 100 1897 100 98 100 100 99 99 100 1898 101 99 100 100 100 100 100 1899 100 102 102 104 102 102 102 1900 104 105 105 106 105 105 106 1901 107 107 107 110 108 108 108 1902 111 111 111 114 111 111 112 1903 114 114 116 118 115 115 116 1904 115 113 117 120 116 116 117 1905 119 115 .118 122 117 118 119 1906 127 120 123 126 122 123 124 1907 136 126 127 130 127 129 129 4s Of course, these figures for relative rates of pay per hour cannot safely be accepted as indices of changes in cost of labor to employers, or in money incomes to wage-earners. The latter topics receive attention in Chapter XI, i, 3, and Chapter XIII, ii, 1. MITCHELL: BUSINESS CYCLES 135 120 no 100 90 Chart \z. Relative wages per hour of Male IN 41 Manufacturing 1890 - 1907. AND Female Industries. Employees 140 130 120 110 100 90 Males t / f — — — — FEmalcs - — Both Sexes 1 ^ /' 1^- ^ *j? y •--. ^^ ^^ ^ ^' •f^ X; d^ A*^ 1890 "91 '92 '93 '94 '35 '96 '97 "98 '99 1900 '01 "OZ '03 '04 '05 'OG '07 120 110 100 90 CHART Relative Prices of Labor 15. AND OF Commodities 140 130 IZO no 100 90 AT RETAIL AND WHOLESALE IN THE UNITED STATES. 1890-1907. labor- relative prices per hr. in 4.1 mfg. indostrl Commodities at retail - 30 staple foods - / V • ••.. •. # * 2 ^ f ^ \ .„„. 1 ^ k / • ^^ < * ,-" • •< ,.•• 1890 '91 '92 '93 "94 '95 'ge '91 '98 '93 1900 *0i "oz M '04 'o5 '06 '07 136 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA TABLE 16 Decils of Relative Wages per Hour in Forty-one Manufacturing Industries of the United States. Weighted by Number of Employees in Each Occupation and Industry. By Years, 1890-1907 Average actual wages per hour in 1890-99 = 100 Year Lowest relative wage 1st decil 2a decil 3d decil 4th decil Median 6th decil 7th decil 8th decil 9th decil Highest relative wage 1890 82 97 98 99 99 100 101 102 103 105 126 1891 84 97 98 99 99 100 101 102 103 105 123 1892 84 98 99 99 100 101 101 102 103 105 120 1893 79 98 99 100 100 101 102 102 104 106 117 1894 85 94 96 97 98 98 99 99 100 101 114 1895 74 95 97 97 98 98 99 99 100 101 128 1896 80 97 98 99 99 100 100 100 101 103 127 1897 78 95 97 99 99 100 100 101 101 102 121 1898 80 96 98 98 99 100 101 101 102 105 116 1899 75 97 99 100 101 102 103 104 105 106 127 1900 72 99 101 103 103 105 106 107 110 110 134 1901 77 102 103 104 106 107 108 110 112 114 138 1902 74 103 106 109 110 111 112 114 115 120 165 1903 73 107 110 112 113 113 115 117 120 125 186 1904 75 108 110 113 113 114 116 119 121 127 171 1905 75 108 112 114 115 117 118 121 125 130 200 1906 76 111 115 118 120 122 124 127 131 137 276 1907 76 113 120 122 125 127 129 134 137 145 304 3. The Prices of Labor in England England alone among our foreign countries possesses comprehensive statistics of wages for the period since 1890.'"' Table 17 reproduces the index number of wages compiled by the Board of Trade, and indicates sufficiently the scope of the data. While agriculture and coal mining are included, the manufacturing industries are by no means so well represented as in the American material. English wages pursue a course far more even than do prices at wholesale. But when compared with the Board of Trade's series for the retail prices of food the difference is less marked. Wages fell less than the cost of food in 1890-95, but rose more rapidly in 1896-1900. On the other hand, wages fell in 1900-03 while the retail prices of food were rising slowly. In 1905-07 working- men regained part of this lost ground; for wages went up much faster than food prices. But after the crisis they suffered doubly — wages fell slightly and the prices of food advanced (see Chart 15). 40 The best German material is that compiled by Dr. R. Kuczynski, Die Entwieklung der gewerhlichen Lohne seit der Begrundung des Deutschen Beiches, Berlin, 1909. But Kuczynski does not consider his data full enough to justify the compilation of averages for large groups of industries. A few French aeries are published in the Annuaire statistique de France. MITCHELL : BUSINESS CYCLES 137 CHART 14. RANGE CXMRED BY THE FUUCTUATIONS IN THE RELATIVE PRICES OF LABOR PER HOUR IN 41 MANLFACTURING INDUSTRIES 1890-1907 HIGHE5T RELATIVE WAGE 9"' DECIL. 8* DECIL. 7* DECIL. 6"' DECIL MEDIAN. 4" DECIL. 3" DECIL 2"^ DECIL. I •' DECIL LOWEST RELATIVE WAGE 2B0 Z60 240 1890 sr 'S2 33 34 35 3C 51 38 '93 1300 01 02 03 04 '05 OS 07 OS 03 1910 138 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 17 General Course of Wages in the United Kingdom By Years, 1890-1910 Average rates in 1890-99 = 100 Building trades ; bricl layers, carpenters, joiners, and masons. Mean of 74 rates Coal mining : hewers. Weighted percentage changes in principal districts Engineering: fitters, turners, iron founde and pattern makers. Mean of 36 rates 11 .. 0) p, to ^ o ti . CO Unweighted means of preceding groups of trades A u Oi V \ t-i 11 1^ 1890 94 109 97 100 97 99 100 1891 95 110 98 102 100 101 101 1892 97 100 98 100 100 99 99 1893 98 102 97 99 99 99 99 1894 99 97 97 99 99 98 98 1895 100 92 98 99 99 98 98 1896 IOj. 91 102 99 99 99 99 1897 103 92 103 99 100 100 100 1898 106 100 104 99 102 102 102 1899 107 106 105 103 103 105 105 .jOO 109 127 105 105 107 110 111 1901 109 119 105 105 108 109 109 1902 109 111 105 105 108 107 107 1903 109 108 105 105 108 107 106 1904 109 105 105 105 108 106 106 1905 109 103 105 107 109 107 106 1906 109 106 106 111 108 108 108 1907 109 122 107 114 108 112 113 1908 109 119 107 114 109 111 112 1909 109 113 106 112 109 110 110 1910 109 114 107 112 109 110 110 Averages 1890-99 100 100 100 100 100 100 100 1900-09 109 113 106 108 108 109 108 Computed from the Twelfth Abstract of Labour Statistics of the United Kingdom, p. 54, by shifting the base from rates in 1900 zz 100 to average rates in 1890-99 = 100. MITCHELL : BUSINESS CYCLES 139 Finally, when the English and American index numbers of wages are com- pared, they are found to reflect the differences in the course of business cycles which have twice been emphasized. In the depression of 1901-04 the English wage-earners lost much of the gains they had scored in the prosperous years 1896-1900. American wages, on the contrary, received no setback in the short- lived depression of 1903-04. It is for this reason that in 1907 the American table shows much heavier gains than the English table over the level of 1890. But when only the first decade is examined, the comparison comes out the other way. Depression was more severe on this side of the Atlantic, and the relative prices of labor in 1900 were materially lower here than in England. 130 120 no 100 So Chart 15 Relative. Prices of labor and of Commodities AND Wholesale in England 1890-1910 AT RETAIL 130 120 110 100 90 COMMODITIES AT RETAIL _..••' / / \ \ / -— -X ^. .^■^ <^- / ^ ***' ^ ^,» ••■ ,'' ,.*•'' "^ ■K X / / "^N ," 1830 '9; '92 '93 '94 '35 '9S '97 '98 '99 1900 'Oi '02 '03 '04 "05 '06 '01 '08 '09 1910 140 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA III. The Prices of Loans — Interest 1. The Tables of Interest Rates The iLmerican statistics of interest, available for the years 1890-1911, come from a single money market. But this one market — New York — is by far the most important in the country. Moreover, it has such close connections with all the lesser financial centers that its rates both affect and are affected by changes occurring elsewhere. Loan funds are so fluid a commodity that out- side banks and capitalists can lend, and outside business enterprises of large size can borrow in New York. The objections to relying upon statistics from this one market as indicative of fluctuations in the rates of interest are there- fore less serious than would be the objections to a similar procedure with reference to retail prices or wages. It is true that the farmers and most busi- ness men of the interior have practically no access to the metropolitan market. Such borrowers must pay the rates of interest charged by local banks and capitalists, and these rates are usually higher than those current in New York. But these interior rates, particularly in the larger towns of the northeastern and north central states, probaljly rise and fall in rough conformity with rates in New York, and our interest is in the fluctuations rather than in the actual magnitude of the rates. Moreover, the reminder is again pertinent that busi- ness cj^cles develop their most distinctive phenomena among the larger business enterprises in the centers of industry, commerce, and finance. In modern business the distinction between loans on long time and short time is clearly drawn and highly important. Short loans, negotiated to meet temporary capital requirements such as the purchase of supplies, the payment of labor, etc., are made chiefly by commercial banks, and by business enterprises which sell their goods on credit. Long loans, negotiated to meet permanent capital requirements such as the purchasing of land, buildings, machinery, fran- chises, etc., are made chiefly by individual investors, savings banlis, insurance companies, and endowed institutions.*^ For long-time loans no market rates of interest are regularly quoted. A good substitute for such quotations, however, is afforded by the net rates of interest realized by investors who lend money to governments or business enterprises by purchasing bonds. The number of bonds for which net yields can be computed by months since 1890 is small. The whole class of state and municipal bonds is barred out by lack of satisfactory quotations. National bonds, while quoted every month, are prevented from reflecting accurately general market conditions by the require- 47 The remainder of this section consists chiefly of a revised version of the article on "Bates of Interest and the Prices of Investment Securities, 1890-1909," published in the Journal of Political Economy, April, 1911. MITCHELL: BUSINESS CYCLES 141 ments of the National Banking Act. Moreover, there is no single type of United States bonds which has been upon the market during the whole period since 1890. It is only by treating the "4 per cents of 1925" as a continuation of the "4 per cents of 1907" that a continuous series can be approximated. Some arbitrary assumption is involved in grafting one of these series upon the other. The device used is to multiply the net yields of the 4s of 1907 in 1890-95 by 1.026— the ratio between the yields of the two issues of 4s in 1896, which is the first full year that both were upon the market. This shift is more simple than accurate, and the composite series which it gives cannot be highly com- mended.*' Fortunately, there remains one class of bonds for which better quotations are available. The railway bonds now listed on the New York Stock Exchange number over 600 ; but of these few date back to 1890 and have substantially complete quotations for every month since then. To be available, bonds must also have several years to run after 1911; for otherwise they are not now trustworthy indices of the interest rates which investors require on long loans. Indeed, only the ten securities described in Table 18 meet all requirements passably, and of these not all have been above suspicion as conservative investments during the whole period covered. The lowest and highest prices of these bonds in each month of 1890-1911 were obtained from the Financial Revietv. The means between these extreme quotations were struck, after accrued interest, as of the middle of the month, had been deducted. Then net yields were computed for each month from these mean quotations by the aid of bond tables.*" Finally, net yields by quarters and by years were computed by averaging the monthly figures.'"' To show the variations in interest rates more clearly, columns of relative rates, computed on the basis average actual net yields in 1890-99 = 100, were added to the tables." Table 19 presents the results by years. The bonds are arranged in the order of their average net yields in 1890-99. The figures for quarters and months are given in Tables 21 and 22. Since the latter tables would be made unduly bulky by printing the full figures for all the securities only two bond series are included, namely, the general average and the series for one issue which merits especial attention. (See p. 157.) 48 See Table 20. The net yields for different issues of United States bonds from 1878 to 1909 are given in A. Piatt Andrew's Statistics for the United States (National Monetary Commission. Senate Document, no. 570, 61st Congress, 2d session), p. 281. 49 The computing was done by Donald English, sometime Assistant in Economics in the University of California. When a bond lacked a quotation for some month, its net yield was interpolated by supposing that this yield varied from the net yield of the preceding or following month in the same proportion that the average net yields of the remaining bonds varied. Interpolations were necessary, however, in less than 2 per cent of the oases. 50 Frequent discrepancies of one point may be found between the average net yields by quarters and by years. They are due to the carrying of fractions of .5 or more and the dropping of smaller fractions. Sta- tistical offices often arbitrarily change averages so as to be formally consistent with the figures from which they are struck; but this practice is less accurate in substance, though more accurate m form, than the one followed here. 61 The average relative yields are computed on the index number plan from the relative figures for each of the ten bonds — not from the average actual yields of all the bonds. 142 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA Name of railway Chicago and Eastern Illinois Missouri, Kansas and Texas Wabash Chesapeake and Ohio Chicago, St. Paul, Min- neapolis and Omaha Chicago, Burlington and Quincy TABLE 18 Description of the Eailway Bonds Included in the Following Tables Amount of issue in millions of dollars Name of bonds General Consolidated and first mortgage First mortgage First mortgage First consolidated mortgage Consolidated mortgage Nebraska Extension bonds, secured by deposit of first mortgage bonds of Medium of payment Dates of Outstanding Authorized 1890 1909 Bate of interest % Moody's rating in 1909* Issue Maturity 1887 1937 30 4 20 5 A a Gold 1890 1990 40 39 40 4 A a Gold 1889 1939 34 23 34 5 A a a Gold 1889 1939 30 22 28 5 A a 1880 1930 30 13 16 6 A a a Nebraska branch roads 1887 1927 t 25 23 4 A a a, Central Eailroad of New Jersey General mortgage Gold 1887 1987 50 35 45 5 A a a Chicago, Milwaukee and St. Paul General mortgage, "Series A" Gold 1889 1989 150 9 49 4 A a a New York, Chicago and St. Louis First mortgage Gold 1887 1937 20 20 19 4 A a a West Shore Eailroad First mortgage, guaranteed by the New York Central 1885 2361 50 50 50 4 A a a * Prom Moody's Anai 'ysis of Railroad/ Investments (New York, 1909). Moody 1 •ecognizes 14 classes of securities, of which A u u and A are the highest. t $20,000 per mile. TABLE 19 Actual and Eelative Eates of Interest Yielded by Investments in Ten American Eailway Bonds by ^EABS, 1890-1911: Actual Eates CM 6 % 5.24 % 5.20 % 4.99 d d % 5.09 fM a© d=^ % 4.96 d d % 4.53 O % 4.55 OS d % 4.39 % 4.38 «■ aj % 3.88 Averages 1890 > (a % 5.10 > % 4.35 < % 4.72 1891 5.28 5.25 5.06 5.11 5.06 4.92 4.61 4.79 4.42 3.96 5.15 4.54 4.85 1892 5.03 5.04 4.81 4.85 4.84 4.73 4.53- 4.49 4.18 3.90 4.91 4.37 4.64 1893 5.16 5.17 4.95 5.00 4.97 4.94 4.60 4.42 4.30 4.02 5.05 4.46 4.75 1894 5.14 5.04 4.83 4.75 4.63 4.72 4.40 4.46 4.04 3.87 4.88 4.30 4.59 1895 5.07 4.76 4.72 4.59 4.56 4.64 4.36 4.38 3.87 3.82 4.74 4.21 4.48 1896 5.12 4.92 4.80 4.72 4.65 4.80 4.34 4.28 3.89 3.85 4.84 4.23 4.54 1897 5.02 4.78 4.76 4.48 4.28 4.51 4.47 3.96 3.78 3.72 4.66 4.09 4.38 1898 4.71 4.57 4.54 4.29 4.12 4.07 4.46 3.83 3.80 3.69 4.45 3.97 4.21 1899 4.32 4.34 4.26 4.12 3.97 3.47 4.23 3.59 3.71 3.56 4.20 3.71 3.96 1900 4.27 4.40 4.20 4.12 4.09 3.42 4.07 3.61 3.71 3.57 4.22 3.68 3.95 1901 3.90 4.11 4.08 4.00 3.83 3.40 3.81 3.59 3.66 3.54 3.98 3.60 3.79 1902 3.84 4.05 4.07 4.01 3.81 3.50 3.63 3.51 3.73 3.55 3.96 3.58 3.77 1903 4.15 4.13 4.24 4.19 4.09 3.69 3.84 3.70 3.89 3.70 4.16 3.76 3.96 1904 4.10 4.06 4.15 4.12 4.03 3.72 3.78 3.68 3.83 3.72 4.09 3.75 3.92 1905 3.95 3.97 ' 4.08 4.04 3.79 3.61 3.69 3.59 3.79 3.70 3.97 3.68 3.82 MITCHELL : BUSINESS CYCLES 143 TABLE 19— (Concluded) Actual and Eelative Bates of Interest Yielded by Investments in Ten American Railway Bonds by Years, 1890-1911: Actual Rates D 1 6 d-^ m d ■s d to Averages r > "S > •a ^ 5 % % % % % % % % % % % % % 1906 4.0( i 4.03 4.24 4.10 3.97 3.78 3.89 3.71 3.82 3.80 4.08 3.80 3.94 1907 4.44 [ 4.24 4.60 4.45 4.27 4.08 4.11 3.95 4.07 3.97 4.40 4.04 4.22 1908 4.32 ; 4.15 4.63 4.32 4.18 4.04 4.04 3.93 4.04 3.95 4.32 4.00 4.16 1909 4.14 4.01 4.24 4.13 3.95 3.94 3.89 3.87 3.94 3.89 4.09 3.91 4.00 1910 4.33 4.08 4.42 4.25 4.14 4.08 4.02 4.03 4.04 3.96 4.24 4.03 4.14 1911 4.35 ' 1.12 4.50 4.26 4.13 4.11 4.06 4.05 4.03 3.97 4.27 4.04 4.16 Averages 1890-99 5.01 • 1.91 4.77 .4.70 4.60 4.53 4.46 4.26 4.04 3.83 4.80 4.22 4.51 1900-09 4.12 ' 1.12 4.25 4.15 4.00 3.72 3.88 3.71 3,85 3.74 4.13 3.78 3.95 Relative Rates . Average actual yieldi s in 1890-99 : = 100 actual ^ O j3 1 d d SO d"* d d »8 Averages Av. 1 yields, 1890-99 5.01 4.91 4.77 4.70 4.60 4.53 4.46 4.26 4.04 3.83 2 cq < 1890 105 106 105 108 108 100 102 103 108 101 106 103 105 1891 105 107 106 109 110 109* 103 112 109 103 107 107 107 1892 100 103 101 103 105 104 102 105 104 102 103 103 103 1893 103 105 104 106 108 109 103 104 107 105 105 106 105 1894 103 103 101 101 101 104 99 105 100 101 102 102 102 1895 101 97 99 98 99 102 98 103 96 100 99 100 99 1896 102 100 101 100 101 106 97 100 96 101 101 100 100 1897 100 97 100 95 93 99 100 93 94 97 97 97 97 1898 94 93 95 91 89 90 100 90 94 96 92 94 93 1899 86 88 89 88 86 77 95 84 92 93 87 88 88 1900 85 90 88 88 89 75 91 85 92 93 88 87 88 1901 78 84 86 85 83 75 86 84 91 93 83 86 85 1902 77 83 85 85 83 77 81 82 92 93 83 85 84 1903 83 84 89 89 89 81 86 87 96 97 87 89 88 . 1904 82 83 87 88 88 82 85 86 95 97 86 89 87 1905 79 81 86 86 82 80 83 84 94 97 83 88 85 1906 81 82 89 87 86 83 87 87 95 99 85 90 88 1907 89 86 96 95 93 90 92 93 101 104 92 96 94 1908 86 85 97 92 91 89 91 92 100 103 90 95 93 1909 83 82 89 88 86 87 87 91 98 102 86 93 89 1910 86 83 93 90 90 90 90 95 100 103 88 96 92 1911 87 84 94 91 90 91 91 95 100 104 89 96 93 Averages 1890-99 100 100 100 100 100 100 100 100 100 100 100 100 100 1900- -09 82 84 89 88 87 82 87 87 95 98 86 90 88 144 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA The best records of short-time interest rates in New York are likewise published in the Financial Revieiv. These tables show by weeks the rates (1) for call loans at the stock exchange and at the banks and trust companies, (2) for seven kinds of time loans, ranging from 30 days to 7 months, and (3) for three descriptions of commercial paper. Of call rates, those quoted at the stock exchange are both the most important and the most regularly recorded. The record for commercial paper is not quite complete ; for during the height of crises there are sometimes weeks in which no rate is quoted, or in which the quoted rates are said to be merely nominal. But the figures for time loans present even more gaps. Accordingly, the data selected are (1) the average rates for call loans at the stock exchange, (2) the rates for choice double-name commercial paper running 60 to 90 days, and (3) the rates for good single- name commercial paper running 4 to 6 months. 120 110 100 90 80 70 Chart \6 Relative Rates of Interest Yielded American Railwat Bonds and in United 1890-1910 BY Investments States 4's of l9oi N Ten and 1925. no 100 90 80 70 ', WEST Shore. Railway average. of ten railway bonos United States 4's of I90i and 1325. ^^"' S ^ ^ ^ ■. / , X ^^ — X / ^ ^ / / -— , 's * \1 \ ■V / ""*"■ • "-. • ,j^ /■' / - .' \ .- •-.. .-•''' ■"" 1890 91 '92 '93 '94 '95 '96 '91 '98 '99 1900 01 "02 '03 '04 '05 '06 '07 08 09 1910 MITCHELL: BUSINESS CYCLES 145 CHART 17. 220 RELATIVE RATES OF INTEREST ON BONDS. / COMMERCIAL PAPER, AND CALL LOANS IN NEW YORK / 1830-1910. / 200 AVERAGE OF TEN RAILWAY BONDS. COMMERCIAL PAPER 60-30 DAYS 180 CALL LOANS AT STOCK EXCHANGE i j i i 160 160 ! 1 / /■ \ ^ i 160 140 1 1 1 I! / 140 1 1 1 1 / ( 1' .1 ll /■ 1 1 1 120 i 11 n 1 i _ / / 1 r I 1 1 ^ \ leo 1 } ll \ \ \ 1 \l 1' i 1 \ \ \ ; 1 1 • 1 ll i I 1 1 \ 100 ^ >Y 1- 1 f ■n J ll I / ii 1 1 100 1 !i -*r 1: 1 N "K. * / 1 1 ^y r i! 1 1 !l i'l 1/ -\ y r 1 y 1 \^ 1 \ 1 / / 80 1', ii * / i i i 80 i! / ll :i / / 1 1 i .' l| / 1 1 ! / 1 i / / i i 1 1 /■ / 60 1 1 1 60 1 1 1 1 i 1 \^'^ )E/ V. ^ K 1 i mi J5 11 m ] 40 i \,<> X V 1890 '91 '92 '93 '94 'S5 '9G '97 '98 '39 1900 '01 02 '03 04 '05 '06 W 08 09 m 'II 146 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE 20 Actual and Relative Rates of Interest on Bonds, Commercial Paper, and Call Loans in New York by Years, 1890-1911 Relative rates of interest Actual rates of interest Average actual rates 1890-99 = 100 r Bonds Commercial paper ^/ Call loans at Stock Exchange Bonds Commercial paper r Year j U. S. 4s of 1907 md 1925 West Shore R. R. Av. of 10 R. R. bonds 4-6 months 60-90 days U. S. 4s of 1907 and 1925 West Shore R. R. Av. of 10 R. R. bonds 4-6 months 60-90 days Call loans at Stock Exchange 1890 2.43% 3.88% 4.72% 6.89% 5.64% 5.81% 88 101 105 115 123 176 1891 2.65 3.96 4.85 6.50 5.41 3.42 96 103 107 109 118 104 1892 2.80 3.90 4.64 5.38 4.04 3.03 101 102 103 90 88 92 1893 3.04 4.02 4.75 7.62 6.86 4.58 110 105 105 127 150 139 1894 2.79 3.87 4.59 5.22 3.04 1.06 101 101 102 87 66 32 1895 2.89 3.82 • 4.48 5.73 3.64 1.85 105 100 99 96 79 56 1896 3.14 3.85 4.54 7.02 5.76 4.21 114 101 100 117 126 128 1897 2.73 3.72 4.38 4.72 3.57 1.77 99 97 97 79 78 54 1898 2.69 3.69 4.21 5.31 3.82 2.16 97 96 93 89 83 66 1899 2.47 3.56 3.96 5.48 4.05 5.04 89 93 88 92 88 153 1900 2.18 3.57 3.95 5.71 4.38 2.93 79 93 88 95 96 89 ]901 1.97 3.54 3.79 5.41 4.24 3.98 71 93 85 90 93 121 1902 1.98 3.55 3.77 5.75 4.88 5.22 72 93 84 96 106 159 1903 1.99 3.70 3.96 6.21 5.43 3.79 72 97 88 104 118 115 1904 2.09 3.72 3.92 5.13 4.24 1.78 76 97 87 86 93 54 1905 2.00 3.70 3.82 5.17 4.35 4.39 72 97 85 86 95 133 1906 2.04 3.80 3.94 6.24 5.68 6.44 74 99 88 104 124 196 1907 2.18 3.97 4.22 6.55 6.27 7.27 79 104 94 109 137 221 1908 2.44 3.95 4.16 4.95 4.42 1.97 88 103 93 83 96 60 1909 2.52 3.89 4.00 4.67 3.86 2.70 91 102 89 78 84 82 1910 2.74* 3.96 4.14 5.72 5.01 2.97 99* 103 92 96 109 90 1911 2.68* 3.97 4.16 4.71 4.02 2.57 97* 104 93 79 88 78 Averages 1890-99 2.76 3.83 4.51 5.99 4.58 ■ 3.29 100 100 100 100 100 100 1900-09 2.14 3.74 3.95 5.61 4.78 4.05 77 98 88 93 104 123 * Average yields of January, April, July, and October. Report of the Comptroller of the Currency, 1911, p. 823. MITCHELL: BUSINESS CYCLES 147 TABLE 21 Rates op Interest on Bonds, Commercial Paper, and Call Loans in New York by Qqartebs, 1890-1911 Relative rates of interest Actual rates of interest Average actual rates 1890-99 = 100 -1st quarter Bor ids Commercial paper Call loans at Stock Exchange 5.58% Bonds Commercial paper 1890- West Siiore R. R. 3.83% Av. of 10 R. R. bonds 4.65% 4-6 months 6.44% 60-90 days 5.30% West Shore R. R. 100 Av. of lOR. R. bonds 103 4-6 months 108 60-90 days 116 Call loans at Stock Exchange 169 2d quarter 3.84 .4.64 6.45 5.07 4.62 100 103 108 111 140 3d quarter 3.87 4.72 6.48 5.47 7.42 101 105 108 119 225 4th quarter 3.98 4.87 8.17 6.98 5.62 104 108 136 152 171 1891- -1st quarter 3.93 4.83 6.76 5.41 3.27 103 107 113 118 99 2d quarter 3.96 4.88 6.40 5.26 3.62 103 108 107 115 110 3d quarter 3.99 4.89 6.64 5.72 3.00 104 108 111 125 91 4th quarter 3.97 4.78 6.14 5.18 3.85 104 106 103 113 117 1892- -1st quarter 3.90 4.65 5.27 3.97 2.14 102 103 88 87 65 2d quarter 3.88 4.60 4.58 3.14 1.62 101 102 77 69 49 3d quarter 3.90 4.64 5.45 3.99 2.63 102 103 91 87 80 4th quarter 3.92 4.67 6.26 5.19 5.81 102 103 105 113 176 1893- -1st quarter 3.95 4.62 6.33 5.84 5.31 103 103 106 127 161 2d quarter 4.03 4.71 8.10 7.02 5.62 105 105 135 153 171 3d quarter 4.15 4.97 9.84 9.33 5.65 108 110 164 204 172 4th quarter 3.96 4.71 6.29 4.68 1.74 103 104 105 102 53 1894- -1st quarter 3.91 4.64 5.17 3.30 1.04 102 103 86^ 72 32 2d quarter 3.87 4.57 4.83 2.96 1.08 101 101 81 65 33 3d quarter 3.87 4.59 5.13 3.15 1.00 101 102 86 69 30 4th quarter 3.83 4.55 5.75 2.80 1.14 100 101 96 61 35 1895- -1st quarter 3.84 4.62 6.35 3.41 1.67 100 102 106 74 51 2d quarter 3.83 4.49 5.12 3.03 1.56 100 100 86 66 47 3d quarter 3.79 4.37 5.37 3.56 1.34 99 97 90 78 41 4th quarter 3.81 4.43 6.33 4.51 2.85 100 98 106 98 87 1896- —1st quarter 3.81 4.48 7.69 5.57 4.17 100 99 128 122 127 2d quarter 3.82 4.45 5.94 4.72 2.54 100 99 99 103 77 3d quarter 3.92 4.67 7.89 7.05 4.02 102 103 132 154 122 4th quarter 3.85 4.54 6.50 5.79 6.10 101 100 109 126 185 1897- —1st quarter 2d quarter 3.77 3.72 4.43 4.43 4.56 4.54 3.26 3.39 1.67 1.36 99 97 98 98 76 76 71 74 51 41 3d quarter 4th quarter 3.70 3.68 4.34 4.31 4.83 4.96 3.79 3.74 1.61 2.45 97 96 96 95 81 83 83 82 49 74 1898- -1st quarter 2d quarter 3.68 3.78 4.23 4.30 5.17 6.11 3.93 4.29 2.15 2.05 96 99 94 95 86 102 86 94 65 62 3d quarter 4th quarter 3.68 3.64 4.18 4.13 5.23 4.79 3.81 3.27 2.20 2.24 96 95 93 92 87 80 83 71 67 68 148 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE 21— (Continued) Rates of Interest on Bonds, Commercial Paper, and Call Loans in New York by Ql'aeters, 1890-1911 Actual rates of interest Relative rates of interest Average actual rates 1890-99 — 100 —1st quarter Boi ids Commercial paper Call loans at Stock Exchange 3.17% B, 3nds A Commercial paper 1899- West Shore B. R. 3.58% Av. of 10 B, B. bonds 4.00% 4-6 months 4.77% 60-90 days 3.25% West Shore R. B. 94 Av. of 10 B. R. bonds 89 4-6 months 80 60-90 days 71 Call loans at Stock Exchange 96 2d quarter 3.53 3.92 4.85 3.53 3.74 92 87 81 77 114 3d quarter 3.53 3.91 5.66 4.24 4.60 92 87 95 93 140 4th quarter 3.59 4.00 6.86 5.41 8.65 94 89 115 118 263 1900- —1st quarter 3.56 3.97 6.27 4.71 3.50 93 88 105 103 106 2d quarter 3.56 3.94 5.31 3.83 2.23 93 87 89 84 68 3d quarter 3.59 3.97 5.48 4.20 1.47 94 88 92 92 45 4th quarter 3.56 3.91 5.77 4.75 4.51 93 87 96 104 137 1901- —1st quarter 3.49 3.79 5.14 3.88 2.52 91 84 86 85 77 2d quarter 3.54 3.78 5.40 3.95 5.10 93 84 90 86 155 3d quarter 3.56 3.81 5.62 4.52 3.74 93 85 94 99 114 4th quarter 3.57 3.79 5.44 4.73 4.58 93 84 91 103 139 3 902- —1st quarter 3.56 3.75 5.44 4.38 3.70 93 84 91 96 112 2d quarter 3.54 3.73 5.37 4.50 4.55 93 83 90 98 138 3d quarter 3.52 3.77 5.81 4.96 6.19 92 84 97 108 188 4th quarter 3.58 3.83 6.58 5.84 6.44 94 85 110 127 196 1903- —1st quarter 3.63 3.87 5.81 5.25 5.02 95 86 97 115 152 2d quarter 3.69 3.95 5.79 5.00 3.21 96 88 97 109 97 3d quarter 3.72 4.05 6.54 5.73 2.29 97 90 109 125 70 4th quarter 3.76 3.99 6.54 5.83 4.54 98 89 109 127 138 1904- —1st quarter 3.72 3.97 5.61 4.77 1.95 97 88 94 104 59 2d quarter 3.74 3.96 4.71 3.90 1.37 98 88 79 85 42 3d quarter 3.72 3.89 4.90 3.93 1.13 97 87 82 86 34 4th quarter 3.71 3.86 5.31 4.27 2.66 97 86 89 93 81 1905- -1st quarter 3.69 3.82 4.73 3.91 2.60 96 85 79 85 79 2d quarter 3.71 3.82 4.75 3.91 2.70 97 85 79 85 82 3d quarter 3.69 3.81 5.06 4.34 2.60 96 85 85 95 79 4th quarter 3.72 3.84 6.17 5.44 9.67 97 85 103 119 294 1906- -1st quarter 3.74 3.87 5.81 5.13 6.25 98 86 97 112 190 2d quarter 3.79 3.93 5.82 5.34 5.52 99 88 97 117 168 3d quarter 3.82 3.97 6.52 5.97 5.39 100 88" 109 130 164 4th quarter 3.84 3.99 6.77 6.27 8.59 100 89 113 137 261 1907- -1st quarter 3.88 4.05 6.70 6.10 5.67 101 90 112 133 172 2d quarter 3.91 4.15 6.14 5.67 2.58 102 92 103 124 78 3d quarter 3.98 4.22 6.70 6.24 3.92 104 94 112 136 119 4th quarter 4.13 4.45 7.33 7.46 16.20 108 99 122 163 492 MITCHELL: BUSINESS CYCLES 149 TABLE 21— (Concluded) Rates op Interest on Bonds, Commercial Paper, and Call Loans in New York by Quarters, 1890-1911 Relative rates of interest Actual rates of interest Average actual rates 1890-99 = 100 —1st quarter Bonds ' West Av. of ' Shore 10 B. E. B. E. bonds 3.99% 4.26% Commercial paper Call loans at Stock Exchange 2.87% Bonds A -Commercial paper 1908- 4-6 months 6.25% 60-90 days 5.75% West Shore B. B. 104 Av. of 10 B, E. bonds 95 4-6 months 104 60-90 days 125 Call loans at Stock Exchange 87 2d quarter 3.98 4.20 4.70 4.00 1.62 104 93 79 87 49 3d quarter 3.92 4.14 4.58 3.75 1.22 102 92 77 82 37 4th quarter 3.92 4.06 4.69 3.97 2.10 102 90 78 87 64 1909- —1st quarter 3.86 3.97 4.28 3.56 1.96 101 89 71 78 60 2d quarter 3.89 3.98 4.25 3.38 1.88 102 89 71 74 57 3d quarter 3.91 4.00 4.41 3.86 2.30 102 89 74 84 70 4th quarter 3.90 4.05 5.81 5.07 4.66 102 90 97 111 141 1910- -1st quarter 3.95 4.08 5.22 4.56 3.41 103 90 87 99 104 2d quarter 3.97 4.16 5.51 4.77 3.25 104 92 92 104 99 3d quarter 3.96 4.18 6.26 5.44 1.95 103 93 105 119 59 4th quarter 3.96 4.14 5.89 5.26 3.24 103 92 98 115 98 1911- —1st quarter 3.96 4.14 4.64 3.98 2.62 103 92 78 87 80 2d quarter 3.97 4.15 4.40 3.66 2.33 104 92 74 80 71 3d quarter 3.98 4.16 4.96 4.15 2.32 104 93 83 91 71 4th quarter 3.98 4.19 4.93 4.30 2.98 104 93 83 94 91 In reducing the weekly rates given in the source to monthly averages, each week was placed in that month in which fell the majority of its days. Both the high and the low figures were included in making the averages." Relative rates were computed on the same plan as the relative rates for bonds — that is, on the basis of average actual rates in 1890-99 = 100. For convenience of comparison, the results are presented in Tables 20, 21, and 22, side by side with the net yields of bonds.''^ 62 The averages by quarters and by years were not computed from the monthly figures, but directly from the original figures by weeks. Of course this is the more accurate method, although it permits many slight discrepancies to appear between the quarterly or annual figures as entered in the tables, and the correspond- ing figures which may be computed from the rates by months. B3 In his Bate of Interest, Professor Irving Fisher gives the yearly average rate of interest in New York upon "prime two-name 60-day" paper, computed from the Financial Beview "by averaging the highest and lowest weekly rates" (pp. 419, 420). There are numerous small discrepancies between his results and those of this investigation, for which it is difficult to account. The present figures have been checked by three computers and should be arithmetically correct. 150 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 22 Rates of Interest on Bonds, Commercial Paper, and Call Loans in New York by Months, 1890-1911 Actual rates of interest Relative rates of interest Average actual rates 1890-99 = Bonds Commercial paper Call loans at Stock Exchange Bonds A Commercial paper ' West Shore R. B. Av. of ' 10 R. R. bonds 1 '*^ 4-6 months 60-90 days West Shore R. R. Av. of 10 R. R. bonds 4-6 months 60-90 days Call loans at Stock Exchange 1890 January 3.83% 4.62% 6.45% 5.39% 7.70%. 100 102 108 118 234 February 3.82 4.65 6.13 5.04 4.25 100 103 102 110 129 March 3.83 4.67 6.75 5.50 4.25 100 104 113 120 129 April 3.84 4.64 6.65 5.14 4.30 100 103 111 112 131 May 3.84 4.63 6.38 5.06 4.88 100 103 107 110 148 June 3.83 4.65 6.28 5.00 4.75 100 103 105 109 144 July 3.85 4.68 6.25 5.08 4.60 101 104 104 111 140 August 3.88 4.73 6.50 5.61 11.63 101 105 109 122 353 September 3.88 4.76 6.75 5.71 6.75 101 106 113 125 205 October 3.91 4.76 7.25 5.89 5.00 102 106 121 129 152 November 3.99 4.88 8.88 8.20 7.00 104 108 148 179 213 December 4.04 4.96 8.63 7.38 5.00 106 110 144 161 152 1891 January 3.94 4.83 7.28 5.83 3.90 103 107 122 127 118 February 3.92 4.81 6.38 5.00 2.88 102 106 107 109 87 March 3.94 4.86 6.50 5.25 2.88 103 108 109 115 87 April 3.94 4.84 6.25 5.09 3.30 103 107 104 111 100 May 3.96 4.87 6.50 5.33 4.38 103 108 109 116 133 June 3.99 4.93 6.50 5.50 3.25 104 109 109 120 99 July 4.01 4.93 6.60 5.63 2.20 105 109 110 123 67 August 4.00 4.89 6.75 5.75 2.13 105 109 113 125 65 September 3.95 4.84 6.60 5.79 4.50 103 107 110 126 137 October 3.99 4.82 6.41 5.60 4.25 104 107 107 122 129 November 3.98 4.80 6.25 5.10 4.38 104 106 104 111 133 December 3.95 4.73 5.75 4.85 2.94 103 105 96 106 89 1892 January 3.90 4.66 5.45 4.17 2.40 102 103 91 91 73 February 3.89 4.64 4.94 3.69 2.00 102 103 83 80 61 March 3.90 4.65 5.35 3.96 2.00 102 103 89 86 61 April 3.90 4.63 4.81 3.45 2.00 102 103 80 75 61 May 3.87 4.59 4.56 3.18 1.50 101 102 76 69 46 June 3.86 4.59 4.40 2.94 1.40 101 102 74 64 43 July 3.89 4.62 5.13 3.43 1.88 102 102 86 75 57 August 3.89 4.63 5.28 4.00 2.05 102 103 88 87 62 September 3.92 4.67 6.07 4.75 4.13 102 103 101 304 123 October 3.93 4.65 6.44 5.11 5.63 103 103 108 111 171 November 3.90 4.66 6.00 5.11 5.15 102 104 100 111 156 December 3.92 4.69 6.38 5.50 6.81 102 104 107 120 207 1893 January 3.94 4.64 6.06 5.18 4.00 103 3 03 101 113 121 February 3.93 4.60 6.00 4.85 3.00 103 102 100 3 06 91 March 3.97 4.64 6.80 6.80 8.20 104 103 114 148 249 April 4.02 4.64 6.13 5.75 4.88 105 103 102 125 148 MITCHELL: BUSINESS CYCLES 151 TABLE 22— (Continued) Bates op Interest on Bonds, Commercial Paper, and Call Loans in New York by Months, 1890-1911 Actual rates of interest Relative rates of interest Average actual rates 1890-99 = : 100 Bonds Commercial paper Call loans at Stock Exchange 3.60% Bonds Commercial paper 1893 May ' West Shore R. K. 4.03% Av. of 10 E. R. bonds 4.71% 4-6 months 8.35% 60-90 days 6.65% West Shore E. R. 105 Av. of' 10 R. R. bonds 105 r 4-6 months 139 60-90 days 145 Call loans at Stock Exchange 109 June 4.05 4.78 9.75 8.75 8.88 106 106 163 190 270 July 4.14 4.93 9.75 9.75 7.75 108 109 163 213 235 August 4.21 5.07 9.70 9.70 5.50 110 112 162 212 167 September 4.11 4.89 10.14 8.32 3.75 107 108 169 182 114 October 4.02 4.80 7.69 5.96 2.38 105 106 128 130 72 November 3.93 4.67 5.80 4.47 1.70 103 104 97 98 52 December 3.92 4.65 5.50 3.67 1.16 102 103 92 80 35 1894 January 3.94 4.68 5.35 3.50 1.02 103 104 89 76 31 February 3.90 4.64 5.19 3.25 1.00 102 103 87 71 30 March 3.88 4.59 4.94 3.00 1.09 101 102 83 65 33 April 3.84 4.55 4.81 3.15 1.13 100 101 80 69 34 May 3.88 4.56 4.75 2.91 1.10 101 101 79 63 33 June 3.88 4.59 4.94 2.89 1.00 101 102 83 63 30 July 3.88 4.62 4.94 3.00 1.00 101 103 83 65 30 August 3.87 4.60 4.98 3.09 1.00 101 102 83 67 30 September 3.86 4.57 5.50 3.28 1.00 101 101 92 72 30 October 3.84 4.55 5.75 2.72 1.00 100 101 96 59 30 November 3.82 4.53 5.75 2.81 1.03 100 100 96 61 31 December 3.83 4.56 5.75 2.88 1.44 100 101 96 63 44 1895 January 3.83 4.58 5.89 3.00 1.35 100 101 98 65 41 I'ebruary 3.86 4.64 6.79 3.65 1.50 101 103 113 80 46 March 3.83 4.63 6.50 3.90 2.25 100 103 109 85 68 April 3.84 4.58 6.25 3.96 2.25 100 102 104 86 68 May 3.84 4.49 4.85 2.75 1.32 100 99 81 60 40 June 3.82 4.41 4.31 2.63 1.16 100 98 72 57 35 July 3.81 4.39 4.55 2.95 1.40 100 98 76 64 43 August 3.78 4.36 5.50 3.53 1.03 99 97 92 77 31 September 3.77 4.35 6.25 4.04 1.56 99 96 104 88 47 October 3.80 4.38 6.44 4.81 2.17 99 97 108 105 66 November 3.79 4.42 5.50 4.07 1.97 99 98 92 89 60 December 3.84 4.49 6.80 4.58 4.56 100 100 114 100 138 1896 January February 3.83 3.80 4.53 4.46 8.90 7.31 6.00 5.70 4.90 3.94 100 99 100 99 149 122 131 124 149 120 March 3.81 4.46 6.56 5.18 3.50 100 99 110 113 106 April 3.81 4.46 6.31 5.31 3.02 100 99 105 116 92 May 3.83 4.44 5.75 4.53 2.53 100 98 96 99 77 June 3.82 4.45 5.75 4.25 1.94 100 99 96 93 59 July 3.89 4.59 6.40 5.13 2.07 102 102 107 112 63 152 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 22— (Continued) Rates of Interest on Bonds, Commercial Paper, and Call Loans in New York by Months, 1890-1911 Actual rates of interest Relative rates of interest Average actual rates 1890-99 rr: 100 Bonds A Commercial paper Call loans at Stock Exchange 4.69% Bonds A Commercial paper 1896 August West Shore E. R. 3.97% Av. of ' 10 R. R, bonds 4.75% 4-6 months 8.33% 60-90 days 7.75% West Shore R. R. 104 Av. of 10 R. R. bonds 105 4-6 months 139 60-90 days 169 Call loans at Stock Exchange 142 September 3.91 4.67 9.10 8.44 5.45 102 104 152 184 166 October 3.90 4.65 8.56 8.56 11.13 102 103 143 187 338 November 3.86 4.50 6.19 5.25 6.25 101 100 103 115 190 December 3.80 4.46 5.10 3.75 1.95 99 99 85 82 59 1897 January 3.78 4.44 4.69 3.36 1.78 99 98 78 73 54 February 3.75 4.42 4.50 3.00 1.63 98 98 75 65 50 March 3.78 4.43 4.50 3.33 1.62 99 98 75 73 49 April 3.73 4.45 4.63 3.55 1.50 97 98 77 77 46 May 3.73 4.44 4.75 3.54 1.41 97 98 79 77 43 June 3.71 4.39 4.30 3.16 1.20 97 97 72 69 36 July 3.66 4.34 4.38 3.43 1.19 96 96 73 75 36 August 3.71 4.34 4.81 3.75 1.25 97 96 80 82 38 September 3.73 4.34 5.20 4.11 2.22 97 96 87 90 67 October 3.73 4.35 5.25 4.19 2.50 97 96 88 91 76 November 3.67 4.31 4.63 3.45 1.81 96 96 77 75 55 December 3.65 4.26 5.00 3.47 2.92 95 95 84 76 89 1898 January 3.67 4.20 4.63 3.35 2.50 96 93 77 73 76 February 3.66 4.18 4.56 3.13 1.78 96 93 76 68 54 March 3.71 4.30 6.10 4.69 2.17 97 95 102 102 66 April 3.84 4.40 7.58 5.75 2.97 100 98 127 125 90 May 3.78 4.29 6.10 4.63 1.95 99 95 102 101 59 June 3.72 4.21 5.00 3.22 1.25 97 93 84 70 38 July 3.69 4.18 5.00 3.63 1.25 96 93 84 79 38 August 3.67 4.16 5.20 3.64 1.70 96 92 87 79 52 September 3.68 4.18 5.50 4.14 3.78 96 93 92 90 115 October 3.67 4.17 4.94 3.39 2.25 96 92 83 74 68 November 3.64 4.13 4.75 3.31 2.10 95 92 79 72 64 December 3.61 4.09 4.69 3.05 2.41 94 91 78 67 73 1899 January 3.59 4.02 4.50 2.88 2.72 94 89 75 63 83 February 3.58 3.99 4.50 2.95 2.47 94 89 75 64 75 March 3.56 3.99 5.20 3.79 4.10 93 89 87 83 125 April 3.54 3.95 5.25 3.71 5.13 92 88 88 81 156 May 3.54 3.92 4.80 3.59 3.52 92 87 80 78 107 June 3.50 3.89 4.50 3.31 2.63 91 86 75 72 80 July 3.49 3.90 5.06 3.66 4.47 91 87 85 80 136 August 3.51 3.90 5.70 4.35 3.27 92 87 95 95 99 September 3.58 3.94 6.29 4.83 6.38 94 88 105 105 194 October 3.58 3.98 6.00 5.10 7.50 94 88 100 111 228 November 3.57 3.98 6.80 5.36 7.60 93 88 114 117 231 December 3.63 4.03 7.38 5.88 11.13 95 90 123 128 338 MITCHELL: BUSINESS CYCLES 153 Bates of Interest on TABLE 22— (Continued) Bonds, Commercial Paper, akd Call Loans in New York by Months, 1890-1911 Actual rates of interest Relative rates of interest Average actual rates 1890-99 = Bonds Commercial paper Call loans at Stock Exchange Bonds A Commercial paper ^ ' West Shore E. B. Av. of 10 R. R. bonds 4-6 months 60-90 days West Shore R. R. At. a 10 R. R. bonds 4-6 months 60-90 days Call loans at Stock Exchange 1900 January 3.58% 4.01% 6.60% 4.81% 4.15% 94 89 110 105 126 February 3.53 3.95 6.00 4.43 2.25 92 88 100 97 68 March 3.56 3.94 6.13 4.86 3.94 93 88 102 106 120 April 3.54 3.91 5.69 4.30 3.06 93 87 95 94 93 May 3.59 3.94 5.25 3.69 2.00 94 88 88 81 61 June 3.56 3.97 5.00 3.69 1.69 93 88 84 81 51 July 3.58 3.97 5.25 4.00 1.53 94 88 88 87 46 August 3.60 3.97 5.60 4.22 1.30 94 88 94 92 39 September 3.58 3.96 5.56 4.45 1.61 94 88 93 97 49 October 3.58 3.96 6.08 5.06 3.57 94 88 102 110 108 November 3.57 3.91 5.50 4.39 5.06 93 87 92 96 154 December 3.53 3.86 5.81 4.75 5.13 92 86 97 104 156 1901 January 3.51 3.83 5.44 4.08 3.07 92 85 91 89 93 February 3.49 3.79 5.00 3.70 2.00 91 84 84 81 61 March 3.48 3.75 4.83 3.75 2.34 91 83 81 82 71 April 3.51 3.77 5.44 3.97 4.30 92 84 91 87 131 May 3.55 3.79 5.50 3.95 6.88 93 84 92 86 209 June 3.55 3.78 5.25 3.94 4.31 93 84 88 86 131 July 3.57 3.80 5.40 4.25 4.30 93 85 90 93 131 August 3.55 3.81 5.75 4.50 2.44 93 85 96 98 74 September 3.56 3.82 5.79 4.94 4.34 93 85 97 108 132 October 3.58 3.81 5.35 4.64 3.55 94 85 89 101 108 November 3.58 3.79 5.38 4.72 4.19 94 84 90 103 127 December 3.56 3.78 5.63 4.90 6.25 93 84 94 107 190 1902 January 3.56 3.76 5.55 4.56 4.57 93 84 93 99 139 February 3.57 3.75 5.25 4.00 2.38 93 84 88 87 72 March 3.56 3.74 5.50 4.37 3.94 93 83 92 95 120 April 3.56 3.72 5.28 4.53 5.10 93 83 88 99 155 May 3.54 3.72 5.50 4.54 5.56 93 83 92 99 169 June 3.53 3.74 5.33 4.42 2.84 92 83 89 96 86 July 3.51 3.75 5.65 4.64 3.52 92 83 94 101 107 August 3.52 3.78 5.75 4.82 3.78 92 84 96 105 115 September 3.53 3.80 6.17* 5.58* 10.80 92 85 103* 122* 328 October 3.56 3.82 6.93* 5.90* 7.63 93 85 116* 129* 232 November 3.58 3.82 6.29 5.71 4.88 94 85 105 125 148 December 3.61 3.85 6.50* 6.00* 6.81 94 86 109* 131* 207 1903 January 3.63 3.84 5.71 5.22 5.75 95 86 95 114 175 February 3.62 3.85 5.60 4.90 2.88 95 86 94 107 87 March 3.64 3.91 6.08* 5.54* 6.00 95 87 102* 121* 182 April 3.69 3.95 5.91 5.19 4.19 96 88 99 113 127 * Nominal part of the month. 154 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 22— (Continued) Rates or Interest on Eonds, Commercial Paper, and Call Loans in New York by Months, 1890-1911 Actual rates of interest Eelative rates of interest Average actual rates 1890-99 = 100 Bonds Commercial paper Call loans at Stock Exchange 2.44% Bonds Commercial paper 1903 May West Shore R. K. 3.69% Av. of 10 R, R. bonds 3.93% 4-6 months 5.66% 60-90 days 4.75% West Shore E. E. 96 Av, of 10 E. E. bonds 87 4-6 months 95 60-90 days 104 Call loans at Stock Exchange 74 June 3.69 3.98 5.81 5.16 3.05 96 . 89 97 113 93 July 3.72 4.01 6.00 5.43 2.50 97 89 100 118 76 August 3.72 4.07 6.75 5.94 2.03 97 90 113 130 62 September 3.72 4.06 6.75 6.00 2.32 97 90 113 131 70 October 3.77 4.00 6.50 5.79 2.69 99 89 109 126 82 November 3.77 3.98 6.57 5.95 5.19 99 89 110 130 158 December 3.74 3.98 6.55 5.79 5.50 98 89 109 126 167 1904 January 3.72 3.96 5.53 4.89 2.34 97 88 92 107 71 February 3.70 3.97 5.75 4.79 1.81 97 88 96 105 55 Maroh 3.73 3.99 5.55 4.68 1.75 97 89 93 102 53 April 3.75 3.96 4.75 4.13 1.38 98 88 79 90 42 May 3.74 3.95 4.75 3.93 1.55 98 88 79 86 47 June 3.74 3.95 4.63 3.60 1.13 98 88 77 79 34 July 3.72 3.90 4.63 3.55 1.03 97 87 77 77 31 August 3.72 3.89 4.75 3.84 .90 97 87 79 84 27 September 3.72 3.89 5.38 4.29 1.53 97 87 90 94 46 October 3.71 3.87 5.75 4.41 2.03 97 86 96 96 62 November 3.71 3.85 5.15 4.14 2.80 97 86 86 90 85 December 3.70 3.85 5.06 4.28 3.13 97 86 85 93 95 1905 January 3.69 3.83 4.71 4.00 2.25 96 85 79 87 68 February 3.68 3.81 4.71 3.81 2.19 96 85 79 83 67 March 3.70 3.82 4.75 3.93 3.20 97 85 79 86 97 April 3.70 3.82 4.75 4.00 3.25 97 85 79 87 99 May 3.72 3.82 4.75 3.98 2.42 97 85 79 87 73 June 3.71 3.82 4.75 3.75 2.50 97 85 79 82 76 July 3.69 3.81 4.75 4.13 2.31 96 85 79 90 70 August 3.68 3.80 4.85 4.19 2.05 96 85 81 91 62 September 3.69 3.82 5.63 4.72 3.56 96 85 94 103 108 October 3.69 3.83 5.75 4.92 5.31 96 85 96 107 161 November 3.72 3.83 6.00 5.53 7.70 97 85 100 121 234 December 3.74 3.86 6.75 5.79 16.50 98 86 113 126 501 1906 January 3.71 3.85 5.75 5.06 8.65 97 86 96 110 263 February 3.74 3.86 5.79 5.04 4.63 98 86 97 110 141 March 3.76 3.90 6.00 5.28 4.88 98 87 100 115 148 April 3.78 3.92 5.92 5.44 9.50 99 87 99 119 289 May 3.80 3.93 5.81 5.33 4.15 99 88 97 116 126 June 3.79 3.94 5.75 5.25 3.25 99 88 96 115 99 July 3.80 3.95 5.93 5.48 2.97 99 88 99 120 90 August 3.83 3.98 6.50 6.00 4.44 100 88 109 131 135 MITCHELL: BUSINESS CYCLES 155 TABLE 22— {Continued) 1906 September October November December 1907 January February March April May June July August September October November December 1908 January February March April May June July August September October November December 1909 January February March April May June July August September October November December Actual rates of interest ^. — 1a Bonds Commercial paper r ' V , ' -^ West Av. of 4-6 60-90 Call loans Shore 10 E. E. months days at Stock E. E. honds Exchange 3.84% 3.99% 7.21% 6.56% 9.38% 3.83 3.98 6.85 6.30 5.15 3.84 3.98 6.69 6.25 7.50 3.84 4.00 6.75 6.25 14.00 3.85 4.01 6.69 6.15 6.15 3.85 4.03 6.50 5.94 4.38 3.98 4.12 6.81 6.19 6.38 3.91 4.13 6.47 5.92 2.35 3.91 4.13 5.71 5.40 2,31 3.90 4.18 6.25 5.50 3.13 3.94 4.18 6.36 5.75 4.55 3.99 4>23 6.60 6.25 3.06 4.01 4.27 7.17 6.79 4.00 4.05 4.37 7.33* 7.10* 21.00 4.21 4.53 t 7.40* 12.25 4.12 4.44 t 8-00* J 4.60 3.99 4.26 6.70 6.59 4.75 3.97 4.24 5.80 5.06 1.81 4.01 4.27 t 5.63 1.85 4.01 4.22 5.25 4.38 1.72 4.00 4.18 4.25 3.94 1.66 3.93 4.19 4.64 3.69 1.52 3.92 4.19 4.58 3.75 1.22 3.92 4.13 4.43 3.61 1.06 3.92 4.11 4.75 3.89 1.35 3.93 4.09 t 4.10 1.44 3.93 4.05 t 4.04 1.75 3.91 4.02 4.69 3.85 2.90 3.87 3.99 4.40 3.68 1.81 3.85 3.97 4.22 3.54 2.25 3.87 3.97 4.28 3.50 1.85 3.87 3.97 4.25 3.50 1.94 3.88 3.97 4.29 3.44 1.84 3.91 4.00 4.21 3.25 1.87 3.90 3:99 4.15 3.38 2.06 3.90 4.00 4.56 4.04 2.17 3.93 4.02 4.75 4.25 2.69 3.90 4.03 t 5.03 4.31 3.88 4.06 5.98 5.09 4.65 3.92 4.05 5.59 5.09 5.03 Relative rates of interest Average actual rates 1890-99 = 100 Bonds Commercial paper West Av. of 4-6 60-90 Call loans Shore 10 R. R. months days at Stock R. E. bonds Exchange 100 89 120 143 285 100 89 114 137 156 100 89 112 136 228 100 89 113 136 425 101 90 112 134 187 101 90 109 130 133 103 92 114 135 194 102 91 108 129 71 102 92 95 118 70 102 93 104 120 95 103 93 106 125 138 104 94 110 136 93 105 95 120 148 121 106 97 122* 155* 638 110 101 t 161* 372 108 99 t 175* 443 104 95 112 144 144 104 94 97 no 55 105 95 t 123 56 105 94 88 96 52 105 93 71 86 50 103 93 78 81 46 102 93 77 82 37 102 92 74 79 32 102 92 79 85 41 103 91 t 89 44 103 90 t 88 53 102 90 78 84 88 101 89 74 80 55 101 88 70 77 68 101 89 71 76 56 101 88 71 76 59 101 88 72 75 56 102 89 70 71 57 102 89 69 74 63 102 89 76 88 66 103 90 79 93 82 102 90 t 330 131 101 90 100 111 141 102 90 93 111 153 * Nominal t No business. 156 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 22— (Concluded) Actual rates of interest Relative rates of interest Average actual rates 1890-99 = = 100 Bonds Commercial paper Call loans at Stock Exchange 4.72% B. onds A Commercial paper 1910 January 'west Shore R. R. 3.94% At. of ' 10 R. R. bonds 4.06% 4-6 months 5.28% 60-90 days 4.75% West Shore B. R. 103 Av. of 10 R. R. bonds 90 4-6 months 88 60-90 days 104 Call loans at Stock Exchange 143 February 3.94 4.07 5.16 4.44 2.78 103 90 86 97 84 March 3.97 4.10 5.23 4.50 2.88 104 91 87 98 87 April 3.98 4.13 5.59 4.75 3.28 104 92 93 104 100 May 3.99 4.16 5.45 4.75 3.63 104 92 91 104 110 June 3.95 4.18 5.50 4.81 2.77 103 93 92 105 84 July 3.98 4.20 6.16 5.38 2.41 104 93 103 117 73 August 3.96 4.19 6.30 5.43 1.55 103 93 105 118 47 September 3.95 4.13 6.31 5.53 2.00 103 92 105 121 61 October 3.95 4.12 6.21 5.56 3.13 103 91 104 121 95 November 3.96 4.14 6.15 5.50 3.23 103 92 103 120 98 December 3.96 4.15 5.28 4.66 3.38 103 92 88 102 103 1911 January 3.95 4.13 4.61 3.98 3.18 103 92 77 87 97 February 3.97 4.14 4.72 4.09 2.28 104 92 79 89 69 March 3.97 4.16 4.59 3.88 2.28 104 93 77 85 69 April 3.98 4.15 4.28 3.66 2.30 104 93 72 80 70 May 3.96 4.14 4.33 3.63 2.31 103 92 72 79 70 June 3.96 4.14 4.63 3.69 2.40 103 92 77 81 73 July 3.96 4.15 4.79 3.78 2.36 103 92 80 83 72 August 3.99 4.15 4.86 4.19 2.31 104 92 81 92 70 September 4.00 4.17 5.33 4.54 2.28 105 93 89 99 69 October 3.99 4.20 4.93 4.35 2.33 104 93 83 95 71 November 3.98 4.18 4.72 3.91 2.72 104 93 79 85 83 December 3.96 4.19 5.25 4.63 4.03 103 93 88 101 123 * Nominal. t No business. 2. Rates of Interest Yielded hy Investments in Bonds The differences shown by Table 19 among the net yields of the ten bonds may readily be accounted for by differences in the proportionate value of the underlying properties, by the existence or non-existence . of prior liens, by the relative financial strength of the issuing or guaranteeing corporations, etc. Similarly, the frequent changes in rank among the bonds may be ascribed to alterations in these particular conditions, which a well-advised investor con- siders in estimating the risks he runs in buying securities. But there is one fact of more general interest about these differences in yield. The margins between the higher and lower yields have grown narrower in the course of twenty years. In 1890 the maximum difference was 5.24-3.88 MITCHELL: BUSINESS CYCLES 157 per cent = 1.36 ; in 1900 it was 4.40-3.42 per cent = 0.98 ; in 1909, 4.24-3.87 per cent = 0.37. The chief cause of this narrowing of the margins has been an improvement since the middle nineties in the credit of the lower grade issues among investors. The risks imputed to the holding of bonds of such railways as, for example, the Chicago and Eastern Illinois have diminished. With one exception — the bonds of the West Shore Railroad— all the bonds gave lower yields in 1911 than in 1890. The West Shore bonds, guaranteed principal and interest by the New York Central and having over 400 years to run, were rated decidedly higher by investors in 1890 than any other security in the present list. But, since then, the improvement in the financial condition and prospects of other railways has gradually brought their obligations closer to the high standard of securities guaranteed by the New York Central. Indeed, in recent years the bonds of the Burlington, the Milwaukee, and the Central of New Jersey have frequently outranked the bonds of the West Shore. Another factor in reducing the risk and therefore the net yields upon investments in bonds was the adoption of the gold standard in 1900. But it is clear that doubts about the dollar in which interest and principal would be paid troubled the minds of investors in railway bonds less than doubts about the financial condition of the issuing companies. For the bonds in highest credit during the nineties were not expressly payable in gold, and certain, of the bonds in poorest credit were— for example, the securities of the Missouri, Kansas and Texas. The danger of payment in a silver dollar had most influence diiring Mr. Bryan's first campaign. In 1896 the average yield of the six gold bonds rose 0.25 per cent between June and August, and declined 0.24 per cent between August and December. Meanwhile the average yield of the four currency bonds rose 0.37 and declined 0.36 per cent. The average yield of all ten bonds is the best available gauge of the changes in the rates which large American corporations have paid for new loans on long time since 1890, and also the best gauge of the net returns which permanent investors have received upon current purchases of bonds. But it is distinctly not the best gauge of changing rates upon long loans of substantially uniform security. For the latter purpose the yield of the West Shore bonds is prefer- able, since the financial credit of the guarantor was so firmly established in 1890 as to be little shaken by the years of depression and little strengthened by the years of prosperity. In other words, the yields of this issue refiect the changes in the supply of, and the demand for, loan capital for fixed investment with less distortion by the factor of risk than do the yields of the nine other bonds. But, since the yields of the other bonds are more typical of American experience since 1890, the detailed tables have been arranged to show both the net yields of the West Shore bonds, and the average net yields of all ten. 158 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA The general course of the average yields has been as follows : Starting at 4.62 per cent in January, 1890, the rate rose with the business difficulties of the siunmer and autumn to 4.96 per cent in December. During the reaction which followed the figure fell to 4.81 in February, but rose again to 4.93 in July. The extraordinarj^ shortage in the European wheat harvest of 1891 combined with the abundant American crop to change the bond market, as it did so many other features of the business situation. Yields declined with scarcely a break to 4.59 per cent in June, 1892. Then, as financial difficulties began to accumulate again, the rate went up to 4.69 per cent in December. A brief relaxation of the strain caused a decline to 4.60 per cent in February, 1893 : but when the panic broke out bonds fell in price like all other securities and the average yield mounted to 5.07 per cent in August, the highest point in the twenty-two years. A prompt reduction in interest rates was one of the salient features of the intense depression which followed. By April, 1894, the average yield upon bonds was 4.55 per cent — decidedly less than before the panic began. With some interruptions, the fall continued to 4.35 per cent in September, 1895. Next year the free-silver campaign caused a vigorous advance from 4.45 per cent in June to 4.75 per cent in August; but rates fell again as Mr. Bryan's prospects of victory waned and by July, 3897, the average rate was 4.34 per cent — lower than in 1895. During the years of business revival which followed the summer of 1897 bond yields continued to decline slowly, as they had done during the years of business depression. The only notable interruptions of this fall occurred in March and April, 1898, when the Spanish War began ; in September-December, 1899, when the Boer War broke out and the "boom" in industrial stocks threat- ened to collapse; in May and June, 1900, when a business reaction began in Europe and seemed imminent in America; and in the months following the Northern Pacific corner of May, 1901. The lowest point was reached in April and May, 1902—3.72 per cent. The period of "undigested securities" or the "rich man's panic" turned the tide, and bond yields rose rapidly to a maximum of 4.07 per cent in August, 1903. The gradual return of financial ease brought on a new decline which ran through 1904 to its culmination in August, 1905. But the record of this month — 3.80 per cent — did not equal the low record of 1902. A new phase of development began in September, 1905 — business prosperity accompanied by steadily rising rates of interest on bonds, whereas the pros- perous years 1898-1902 had been accompanied by falling rates. With scarcely a break, bond yields mounted month by month to a climax in November, 1907. As early as March, 1907, the highest record of the "rich man's panic" had been surpassed, and to find an equal to the record of the panic of November — 4.53 per cent — it is necessary to go back eleven years to the excited summer MITCHELL: BUSINESS CYCLES 159 of 1896. But not all the ground gained in 1894-1902 was lost; for the panic of 1907 did not drive bond yields very close to the 5.07 per cent attained in 1893. In this respect the yield upon the West Shore bonds presents a marked contrast to the average yield. This most stable of our securities had shared in most of the short-period oscillations of the average; but its long-period oscillations were different, because, as has been said, its credit was less improved by the good times after 1897 than that of the other bonds. A year before the breaking out of the crisis of 1893 the yield of the West Shore stood at 3.87 per cent; a year before the breaking out of the crisis of 1907 it stood at 3.83. The corresponding figures for the average yields were 4.59 and 3.98 per cent. The West Shore's maximum during the two crises was the same — 4.21 per cent; the maxima of the average were 5.07 per cent and 4.53 per cent. In both cases, however, the increase in yields within the twelvemonth preceding the climax of the crisis was greater in 1907 than in 1893. The conclusion suggested by these facts — that the demand for loan capital for fixed investment was greater in proportion to the supply in the later than in the earlier crisis — is supported by the contrast between the yields during the dull years which followed the two crises. In both cases yields declined after the panic, but the decline was notably less in the later case. On the basis of yields for the whole year, tbe ten bonds fell 0.16 per cent in 1893-94, and 0.06 per cent in 1907-08, while the West Shore bonds fell 0.15 per cent in the first case and 0.02 per cent in the second. In 1909, however, bond yields declined more in comparison with 1908 than they did in 1895 in comparison with 1894. The rather unsatisfactory series for United States bonds (Table 20) pursues a course somewhat different from that of the railway issues. The 4 per cents both of 1907 and of 1925 are "currency" bonds, like the bonds of the West Shore; but they appear to have been influenced much more by the difficulties of the treasury in 1893-95 and by the free-silver campaign of 1896 than were any of the railway securities. The chief anomaly which they present is in giving higher yields in 1896 than in 1893. Thereafter for a time their course paralleled that of the West Shore bonds. That is, their yields declined from 1896 to 1901, advanced until 1904, declined in 1905, and then rose until 1907. But, instead of declining like the yields of railway bonds in 1908-09, they rose in both years, and stood at the close of the period well above their level of twenty years before. These peculiar movements of 1908-09 were influenced by the act of March 4, 1907, which legalized the practice begun by Secretary Shaw of accepting other than United States bonds as security for government deposits with the national banks, and also by the sale of Panama Canal bonds. During all this time, of course, the actual yield upon "governments" remained much smaller than the yield upon any of the railway issues ; but the 160 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA columns for relative rates show that the yield of no railway bond in the list has undergone such violent changes. Instead of proving the stablest of American securities from the investor's point of view, government bonds have proved the least stable among the bonds for which yields have been computed. 3. Rates of Interest upon Short-time Loans How average short-time rates of interest compare with average yields of bonds is summarily shown by the little table which follows:" TABLE 23 Average Eates of Interest Yielded by Investments in Bonds and by Shokt-Time Loans Actual rates Relative rates , ' N , * < 1890-1909 1890-99 1900-09 1890-99 1900-09 United States 4s 2.45% 2.76% 2.14% 100 78 West Shore bonds 3.78 3.83 3.74 100 98 Average of 10 railway bonds 4.23 4.51 3.95 100 88 Commercial paper, 4-6 months 5.78 5.99 5.58 100 93 Commercial paper, 60-90 days 4.68 4.58 4.78 100 104 Call loans 3.67 3.29 4.05 100 123 The twenty-year averages of the investment rates are all lower than the like averages for commercial paper. But the call-loan rate averages less than the yields of any investments except those in government bonds. In comparing the two decades, it appears that the short-time rates have either advanced to higher levels in 1900-09, or receded but little f^ while all the investment rates, except that on West Shore bonds, declined considerably. The diminution of risks seems to have been a less important factor in the market for short-time loans than in the market for investment securities, ISTot less important than these differences in the long-period averages of investment and short-time rates are the differences in stability. How much wider is the range through which the short-time rates fluctuate appears from a glance at the extreme variations. 54 The comparisons in this section are slightly inaccurate, because it is necessary to set discount rates on commercial paper against interest rates on investments in bonds and on call loans. 55 If the quotations for commercial paper, 4-6 months, during the crisis of 1907 were more complete that class of short-time loans would probably show scarcely any decline in the second decade. MITCHELL: BUSINESS CYCLES 161 TABLE 24 Extreme Variations in the Monthly Rates op Interest Yielded by Investments in Bonds and by Short- Time Loans, 1890-1911 Actual rates ' 117"; ~ ~ ^ ^ Relative rates Highest Lowest , «^ ' — p> , * , Differ- Diffier- ■^-'^te Kate Date Rate ence Highest Lowest ence West Shore bonds j^ug., 1893J ^ ^^^^ ^^^^^ ^^^^ ^^^^^ ^^^^ ^^^ ^^ ^^ Average of 10 railway bonds Aug., 1893 5.07 |^P^^ ]:^°^| 3.72 1.35 112 83 29 Commercial paper, 4-6 months Sept., 1893 10.14 July, 1909 4.15 5.99 169 69 100 Commercial paper, 60-90 days July, 1893 9.75 June, 1895 2.63 7.12 213 57 156 Call loans Oct., 1907 21.00 Aug., 1904 .90 20.10 638 27 611 What holds of these extreme variations holds also of the variations from one season of the year to the next. There is but a slight difference between the summer and autumn yields of bonds, while the rates for commercial paper and call loans undergo marked changes. Twenty-year averages for each month show the general trend of the market. Starting from the lowest point of the year in June, rates for commercial paper rise to their highest point in Sep- tember or October, and then decline until February, when they stand little above the lowest level of the summer. The opening of spring business causes a temporary advance in March; but the tide quickly turns and rates decline through April and May to the low starting-point of June. Call-loan rates pursue a somewhat similar but more erratic course ; for their monthly averages, even over a period of twenty years, are disturbed by the extremely high rates which occur during panics and periods of feverish speculation in stocks.°° TABLE 25 Average Seasonal Variations in the Eates of Interest Yielded by Investments in Bonds and by Short- Time Loans During Twenty Years West Shore Railroad bonds Average of 10 railway bonds Commercial paper 4-6 months 60-90 days Call loans January 3.77% 4.23% 5.81% 4.59% 3.79% February 3.76 4.21 5.55 4.27 2.55 March 3.77 4.23 5.74 4.66 3.41 April 3.78 4.23 5.62 4.51 3.36 May 3.79 4.21 5.41 4.26 2.85 June 3.77 4.22 5.37 4.20 2.64 July 3.78 4.24 5.54 4.50 2.69 August 3.80 4.25 5.91 4.93 2.87 September 3.79 4.25 6.33 5.24 4.06 October 3.80 4.24 6.40 5.23 5.02 November 3.80 4.23 6.01 5.02 4.75 December 3.79 4.23 6.02 4.99 ' 6.01 56 The frequent deviations from the general seasonal trend may be followed in the monthly figures of Table 22. The twenty-year averages by years which may be computed from Table 25 do not agree precisely in all cases with the corresponding figures of Table 23. For an explanation see the statement in footnote 52 of this chapter concerning the methods by which the monthly, quarterly, and yearly averages for short-time rates were made. The figures by years are more accurate than the figures by months. Professor E. W. Kemmerer 's Seasonal Variations in the Relative Demand for Money and Capital in the United States (Senate Document, no. 588, 61st Congress, 2d session) provides detailed statistics of the changes in interest rates from one season of the year to the next. The results of the two investigations are in close agreement. 162 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA Table 26 shows tlie average rates of interest yielded by investments in bonds and by short-time loans for the successive phases of each business cycle since 1890. Here the differences which have been commented upon reappear in another form. The lower range of average bond yields in the second decade is contrasted with the relative stability of the ten-year levels for commercial paper. On the other hand, in short periods bond yields are stable and short- time loan rates are variable. But all the rates show the powerful influence of changing business conditions. TABLE 26 Bates of Interest Yielded by Investments in Bonds and by Short- Time Loans in Seasons of Business Prosperity, Crisis, and Depression, 1890-1911 Relative rates of interest Actual rates of interest Average actual rates 1890-99 = 100 ^ « ^ ^ I K. Bonds Commercial paper Bonds Commercial paper West Av. of Call loans West Av. of Call loans Shore 10 B. R. 4-6 60-90 at Stock Shore 10 R. R. 4-6 60-90 at Stock R. R, bonds months days Exchange R. R. bonds months days Exchange Jan., 1890-July, 1890— Prosperity 3.83% 4.65% 6.41% 5.17% 4.96% 100 103 107 113 151 Aug., 1890-Dec., 1890— Minor crisis 3.94 4.82 7.60 6.56 7.08 103 107 127 143 215 Jan., 1891-July, 1891— Depression 3.96 4.S7 6.57 5.38 3.26 103 108 110 117 99 Aug., 1891-Aug., 1892— Prosperity 3.92 4.70 5.51 4.30 2.57 102 104 92 94 78 Sept., 1892-Apr., 1893— Approach of crisis .... 3.94 4.65 6.24 5.38 5.23 103 103 104 ]17 159 May, 1893-Oct., 1893— Major crisis 4.09 4.86 9.23 8.19 5.31 107 108 154 179 161 Nov., 1893-Mar., 1895— Severe depression .... 3.87 4.60 5.48 3.25 1.22 101 102 92 71 37 Apr., 1895-Sept., 1895— Eevival 3.81 4.43 5.29 3.31 1.45 100 98 88 72 44 Oct., 1895-June, 1896— Renewed depression .. 3.81 4.45 6.59 4.94 3.17 100 99 110 108 96 July, 1896-Oct., 1896 — Free-silver campaign.. 3.92 4.67 8.10 7.47 5.84 102 104 135 163 177 Nov., 1896-June, 1897— Depression 3.77 4.44 4.83 3.62 2.17 99 98 81 79 66 July, 1897-Feb., 1898— Revival 3.69 4.29 4.81 3.61 2.02 96 95 80 79 61 Mar., 1898-Apr., 1898— Spanish war impending 3.78 4.35 6.84 5.22 2.57 99 96 114 114 78 May, 1898-Sept., 1899— Prosperity 3.61 4.05 5.12 3.65 3.02 94 90 86 80 92 Oct., 1899-Dec., 1899— Minor crisis 3.59 4.00 6.73 5.45 8.74 94 89 112 119 265 Jan., 1900-Sept., 1900 — Slight depression 3.57 3.96 5.68 4.27 2.39 93 88 95 93 73 Oct., 1900-Oct., 1902— Prosperity 3.54 3.79 5.56 4.52 4.47 93 84 93 99 136 Nov., 1902-July, 1904— "Rich man's panic" 3.70 3.95 5.82 5.09 3.20 97 88 97 111 97 Aug., 1904-Aug., 1905— Revival 3.70 3.84 4.93 4.06 2.35 97 85 82 89 71 Sept., 1905-Sept., 1906— Prosperity 3.76 3.90 6.06 5.42 6.53 98 86 101 118 198 Oct., 1906-Sept., 1907— Approach of crisis .... 3.90 4.10 6.57 6.06 5.25 102 91 110 132 159 Oct., 1907-Dec., 1907— Major crisis 4.13 4.45 *7.33 7.50 15.95 108 99 *122 164 484 Jan., 1908-Sept., 1908 — Severe depression .... 3.96 4.20 5.05 4.50 1.88 103 93 84 98 57 Oct., 1908-Dec., 1909— Eevival 3.90 4.01 4.61 3.99 2.57 102 89 77 87 78 Jan., 1910-Dec., 1911— Reaction 3.97 4.15 5.22 4.52 2.77 104 92 87 99 84 * Nominal. MITCHELL: BUSINESS CYCLES 163 In the periods of business depression which follow on crises rates of interest on well-secured loans of all kinds fall." Call rates and discounts on 60-90 day commercial paper reach their lowest points in such seasons (see Tables 24 and 22) ; but the rates on 4-6 months paper and on bonds usually continue their w?. 1 .""^^ ^* ^^^'* *^^ ^'"'"^'^^ '*^^^' ^^ *^e succeeding revival of activity When the tide of prosperity rises, however, all the short-time rates run up Even the current yields upon bonds rise if the prosperity is long continued and the demand for investment loans grows great, as in 1905-07. On the other ^^onr^?"^ ^^^^^ "^^^ continue to decline throughout a prosperous season as m 1897-1902, if the dwindling of imputed risks is notable. Finally, when the crisis comes rates on all kinds of loans reach their highest points. The available market quotations fail to show the full increase in the discount upon commercial paper during panics, because many loans of this character can scarcely be negotiated on any terms, and because the rates for such business as IS done are often above the nominal quotations. But when the pressure of the panic relaxes rates to solvent borrowers fall off rapidly to the low points characteristic of depression. 4. International Comparisons For comparison with the American tables of net yields upon investments in bonds no foreign material is readily available save with reference to gov- ernment securities. Of course, British consols, French rentes, and imperial German bonds are ultra-conservative investments, and yield exceptionally low rates of interest. Moreover, both the supply of and the demand for these securities are subject in a special degree to certain conditions not arising from the business situation — such as prospects of war and peace, increase of govern- ment expenditures, purchases for government savings banks or sinking funds, changes in the list of securities legally open to investment by trustees, actual or prospective alterations in tax laws, and the like. These peculiar conditions may cause changes in the yields upon government bonds which are not repre- sentative of the general trend of the investment market. But until some student, with the full European material at his command, shall have provided adequate tables of the net yields upon investments in the bonds of business enterprises, changes in the yields of government securities will remain the safest guide to alterations in the long-time rates of interest.^' They are cer- 57 Borrowers in doubtful credit, whether merchants selling commercial paper or corporations selling bonds, may find it difficult to secure loans at any price in such seasons, or may be forced to pay very high rates as an offset to the risks incurred by lenders. 58 Upon foreign rates of interest see A. H. Gibson, The Fall in Consols and Other Investments since 1897 (London, 1908); P. L. Newman, "A Eeview of the Investments of Offices in Recent Years," Journal of the Institute of Actuaries, XLII, 294-320; F. Hawkar, "Note sur les variations du taux de I'int^ret en Belgique," Proceedings of the Fourth International Congress of Actuaries (New York, 1904), I, 345-350; G. Eobert, Bes variations du taux de I'interet (Lyon, 1902); E. Voye, "Ueber die Hohe der verschiedenen Zinsarten, " Samm- lung nationalohonomischer und statistischer Aihandlungen des staatswissenschaftlichen Seminars zu Salle (Jena, 1902) ; N. E. Weill, Vie Solidaritat der GeldmdrMe (Frankfurt a. M., 1903) ; II. Albert, Die geschichtliche Fnt- wiclcelung des Zinsfusses in Deutschland von 1895 his 1908 (Leipzig, 1910). These books contain much statis- tical information, but none in such form as to be strictly comparable with the American tables of the present chapter. 164 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA tainly a safer guide than the corresponding American figures would be f" for during the period considered there has been no such doubt regarding the medium in which the obligations of Grreat Britain, France, and Germany would be discharged as was raised by the free-silver agitation of the nineties, and removed by the Gold Standard Act of 1900. Moreover, the European markets for government bonds are not dominated by any one erratic factor to the same degree that the American market is dominated by the purchases and sales by national banks. Indeed, so exceptional has been the course of government bonds in this country that it is wiser to base the international comparisons upon the net yields of the West Shore Railroad's securities than upon the net yields of United States 4s. The actual yields of European securities are taken from a table showing the "real interest earned upon European .... government bonds at their average market price," published in Andrew's Statistics for the United States.''" But 120 Chart 18 Relative Rates of Interest Yielded by iNVESTMErvrrs in Bonds of the v/est Shore Railway and of the: American , British , Trench , and German Governments. 1890-1909. IjNiTED States 4*3 of I9oi and 1925 West Shore Railway. English Consols 2 % and 2 '/z per cent. French Rentes 3 per cent. German Imperial 3 per cent. 120 1890 '91 '92 '93 94 '95 '96 '91 '98 '93 I9D0 'Ol 02 '03 04 '05 '06 "oi '08 '09 I9l0 69 Albert, op. cit., 42-52, shows that in Germany the fluctuations of interest upon mortgage loans follow closely the fluctuations of net yields upon government bonds during the years 1895-1908. 60 One of the reports of the National Monetary Commission (Senate Document, no. 570, 61st Congress, 2d session, p. 281). In turn, Andrew took his foreign data from the Materialien zur Beurteilung der Zusam- menhdnge zwischen dem offentliohen Schuldenwesen und dem Kapitalmarlcte (Berlin, 1908). MITCHELL: BUSINESS CYCLES 165 the net jdeld of British consols in 1903, the year in which the rate of interest was reduced from 2% to 21^ per cent, is from A. H. Gibson's The Fall in Consols."^ The relative rates of interest have been computed by the methods explained above. The average actual yields in 1890-99 are 2.763 per cent upon United States 4s, 3.827 per cent upon West Shore bonds, 2.673 per cent upon consols, 3.042 per cent upon rentes, and 3.281 per cent upon German 3s. These are the rates which equal 100 in the columns for relative yields in Table 27. TABLE 27 Actual and Relative Bates op Interest Yieldeb by Investments in Bonds of the West Shore Railroad, and OP THE American, British, French, and German Governments By years, 1890-1909 Actual rates Average ac Relative rates :tual rates 1890- A -99 = 100 Tear U. S. 4s of 1907 and 1925 West Shore R.B. English consols 2% and 2^ % French rentes 3% German 3s U. S. 4s of 1907 and 1925 West Shore E. E. English consols 2% and 2% % French rentes 3% German 3s 1890 2.43% 3.88% 2.86% 3.32% 3.45% 88 101 107 109 105 1891 2.65 3.96 2.88 3.19 3.52 96 103 108 105 107 1892 2.80 3.90 2.85 3.09 3.48 101 102 107 102 106 1893 3.04 4.02 2.81 3.10 3.48 110 105 105 102 106 1894 2.79 3.87 2.73 3.01 3.31 101 101 102 99 101 1895 2.89 3.82 2.60 2.95 3.03 105 100 97 97 92 1896 3.14 3.85 2.49 2.95 3.02 114 101 93 97 92 1897 2.73 3.72 2.45 2.91 3.07 99 97 92 96 94 1898 2.69 3.69 2.49 2.93 3.14 97 96 93 96 96 1899 2.47 3.56 2.57 2.97 3.31 89 93 96 98 101 1900 2.18 3.57 2.77 2.99 3.46 79 93 104 98 105 1901 1.97 3;54 2.93 2.98 3.36 71 93 110 98 102 1902 1.98 3.55 2.92 2.99 3.25 72 93 109 98 99 1903 1.99 3.70 2.82 3.07 3.28 72 97 105 101 100 1904 2.09 3.72 2.84 3.09 3.33 76 97 106 102 101 1905 2.00 3.70 2.79 3.04 3.33 72 97 104 100 101 1906 2.04 3.80 2.84 3.08 3.42 74 99 106 101 104 1907 2.18 3.97 2.98 3.18 3.57 79 104 111 105 109 1908 2.44 3.95 2.91 3.13 3.62 88 103 109 103 110 1909 2.52 3.89 2.98 3.09 3.54 91 102 111 102 108 Averages 1890-99 2.76 3.83 2.67 3.04 3.28 100 100 100 100 100 1900-09 2.14 3.74 2.88 3.06 3.42 77 98 108 101 104 61 London, 1908; p. 54. 1G6 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA If the whole period of twenty years be taken, the United States bonds give the lowest average yields. Then in order come the securities of Great Britain, Prance, Germany, and the West Shore Railroad. The margin between the government bonds which give the lowest and highest yields is the same in 1909 as in 1890. Between these two years the American, British, and German bonds have lost ground, while French rentes have gained. European statistics of discount rates are distinctly more complete and more authoritative than the corresponding American figures. It is sufficient to say that the material used consists of the bank rates and market rates in London, Paris, and Berlin. The bank rates are obtained from Palgrave's tables, as published in the National Monetary Commission's Statistics for Great Britain, Germany, and France."' The market rates for London and Paris are annual averages of the weekly rates given in the same document."^ The Berlin market rates are compiled from the StaUsticlie Jahrhilcher filr das Deutsche Reich. The closest American counterpart to the foreign rates is afforded by the series for double-name commercial paper, running 60-90 days. TABLE 28 Actual and Relative Discount Bates on Short-time Loans in New York, London, Paris, and Berlin By years, 1890-1!)11 Actual Rates Year 1890 New York 60-90 days 5.64% London bank rate 4.52% Paris bank rate 3.00% Berlin bank rate 4.52% New York 60-90 days 5.64% London market rate - 3.98%* Paris market rate 2.62% Berlin market rate 3.78%- 1891 5.41 3.26 3.00 3.79 5.41 2.44 2.53 3.02 1892 4.04 2.53 2.70 3.21 4.04 1.47 1.79 1.80 1893 6.86 3.05 2.50 4.07 6.86 2.13 2.22 3.17 1894 3.04 2.n 2.50 3.13 3.04 .97 1.78 1.74 1895 3.64 2.00 2.10 3.14 3.64 .80 1.63 2.01 1896 5.76 2.48 2.00 3.67 5.76 1.47 1.72 3.04 1897 3.57 2.63 2.00 3.81 3.57 1.81- 1.81 3.09 1898 3.82 3.24 2.20 4.27 3.82 2.58 1.99 3.55 1899 4.05 3.75 3.06 5.04 4.05 3.24 2.83 4.45 1900 4.38 3.98 3.24 5.33 4.38 3.64 3.03 4.41 1901 4.24 3.72 3.00 4.10 4.24 3.19 2.41 3.06 1902 4.88 3.33 3.00 3.33 4.88 2,97 2.40 2.19 1903 5.43 3.75 3.00 3.84 5.43 3.38 2.70 3.01 1904 4.24 3.30 3.00 4.23 4.24 2.67 2.14 3.14 * May 16 to end of the year — 33 weeks. 02 Senate Document, no. 578, Olst Congress, 2d session, pp. 134, 137, 140. 03 Pp. 44-62, 315, 316. Among the several London rates I have chosen that for 60-day bills. The London rates for 1910 are computed from the weekly reports of the Economist; the French and German rates for the same year are from the Statistisches JaJirbuch fiir das deutsche Reich, 1911, p. 64.* These German tables make the market rate in Paris a trifle higher than the tables published by the Monetary Commission for 1890-1908. MITCHELL: BUSINESS CYCLES 167 TABLE 2S— {Concluded) Actual and Relative Discount Eates on Short-time Loans in New York, London, Paris, and Berlin By years, 1890-1911 Actual Mates New York London Paris Berlin New York London Paris Berlin ■ 60-90 bank bank bank 60-90 market market market Year days rate rate rate days rate rate rate 1905 4.35% 3.00% 3.00% 3.81% 4.35% 2.64% 2.11% 2.85% 1906 5.68 4.26 3.00 5.15 5.68 4.06 2.69 4.04 1907 6.27 4.92 3.46 6.03 6.27 4.47 3.36 5.12 1908 4.42 3.02 3.05 4.78 4.42 2.24 2.13 3.52 1909 3.86 3.10 3.00 3.93 3.86 2.29 1.79 2.87 1910 5.01 3.72 3.00 4.35 5.01 3.16 2.44 3.54 1911 4.02 3.47 3.14 4.40 4.02 2.92 2.61 3.54 Averages 1890-99 4.58 2.96 2.51 3.87 4.58 2.09 2.09 2.97 1900-09 4.78 3.64 3.08 4.45 4.78 3.16 2.48 3.42 Belative Sates Average actual rates in 1890-99 = 100 New York London Paris Berlin New York London Paris Berlin 60-90 bank bank bank 60-90 market market market Year days rate rate rate days rate rate rate 1890 123 153 120 117 123 191* 125 127 1891 118 110 120 98 118 117 121 102 1892 88 86 108 83 88 70 86 61 1893 150 103 100 105 150 102 106 107 1894 66 71 100 81 66 46 85 59 1895 79 68 84 81 79 38 78 68 1896 126 84 80 95 126 70 82 103 1897 78 89 80 99 78 87 87 104 1898 83 110 88 110 83 124 95 120 1899 88 127 122 130 88 155 135 150 1900 96 135 129 138 96 174 145 149 1901 93 126 120 106 93 153 115 103 1902 106 113 120 86 106 142 115 74 1903 118 127 120 99 118 162 129 102 1904 93 112 120 109 93 128 102 106 1905 95 101 120 99 95 126 101 96 1906 124 144 120 133 124 194 129 136 1907 137 166 138 156 137 214 161 173 1908 96 102 122 124 96 107 102 119 1909 84 105 120 102 84 110 86 97 1910 109 126 120 112 109 151 117 119 1911 88 117 125 114 88 140 125 119 Averages 1890-99 100 100 100 100 100 100 100 100 1 900-09 104 123 123 121 104 151 118 116 * May 16 to end of the year — 33 weeks. 168 MEMOIRS OP THE UNIVERSITY OP CALIPORNIA Chart I9. Relative Bank Discount Ratcs on Short TTme Loans in New York , London , Paris, and Berlin. no 1830-1910. no 160 London Bank Rate. Paris Bank Rate. BERLIN Bank Rate. 1 1 leo 1 1 1 1 ! 1 •1 150 1 ! 150 1 '■ 1 ! \ 140 1 : \ 140 ; I . 1; 1 // V / i 1 \'^ 130 .'/ i\ '. y \\|- 130 i / / •.'•\ 1: / \v. S 1 ii il / / \' \ / / \ \ \\\ ^,^ I 1 IZO Jvl 1 ■'/ ; \ \ ^ 1' i / I 1 120 -> \ \ \ // \ \ / i / / i / \ \ \ \ \ f \l \ — ^ / / / 110 • 1 / 1 / \ V 11 ', no \\ ^' 1 1 ,/ \ .. •A ll ', / 100 \ — 1 'i 1 / 1 // // \/ ,A •A •A 1 \ A ^ / 100 I \ 1 "l / / \ / \\\ \l \ / ; 1 / / \ 1 \ / \ / Bo — vtt 4^- \ / " I / / \ / \ / 90 If \ \ // /\ / / / '. ! A^ / •, 1 I [■■ / \ / / \ f 80 \ r V 'A 80 / / / / / / 10 7 / 70 /"• f 1890 91 92 93 '94 '95 '96 '97 '98 '99 1900 'Ol '02 'OJ "04 '05 'oS 'oi "08 "09 is'lo ' ' MITCHELL: BUSINESS CYCLES 169 CHART 20. RELATIVE MARKET DISCOUNT RATES ON SHORT TIME LOANS 1 IN NEW YORK . LONDON , PARIS , AND BERLIN 1 1 1 1 200 1890-1910. 1 1 1 200 1 1 1 1 UDNDON MARKET RATE. 1 1 - — BERLIN MARKET RATE 1 r 1 180 1 160 \ \ 1 1 1 1 r 1 ' 1 / \ 1 ;l / \ \ 1 1 ; 1 ■ 1 \ 1 • 1 1 1 I i: / ■■••• > i \ \ \ > / / / / / / J 1 I 1 1 il ■i .■/■ // ■••1 i 1 140 i; / 1 r 1 • h 140 1: i: 1' / \ 1 1 1 . / /■/ ^ ^ ' 1. . ■■ 1 \ i ^**, 1 : ;/ ' / 1 120 ^^ ■•\ 1 \ i'j \\* ISO • V, 1 ( \ ti ^ I 1 / /■ ■; i 1 \\ i\ V' 1 1 .•( \\ j \l •, 1 ion l\ l\ 1 ; s T ./ :'; / 1 / /■ 1 7 1 •\.. 11 i ;*•' / 100 • 1 1 ^m 1 1 1 / / S^ / \ \ j 1 1 • 1 If 1 ',/ / s \ / •.1 1 * 1 If r. 1 / / \/ ■.1 -.1 { ( \ A / /' \f 80 80 •1 (■" '. ) / 1 / -.1 /• i; / 1 ■.1 ■ i: I; /, \ 1 1 • r. 1 60 1 1 1 1 1 \ 1 1 1 1 1 1 Art \ \ 1 40 \ 1830 '91 '92 '93 '94 '95 '96 '97 '98 '99 1900 '01 'OZ '03 '04 '05 '06 '07 '08 '09 1910 j 170 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Comparisons between the actual rates are unsatisfactory because of the uncertainty regarding the technical character of the paper discounted in the several markets. But it may be pointed out (1) that the annual averages of foreign bank rates are always higher than the corresponding market rates, (2) that for the whole period both bank rates and market rates are lower in Paris than in London, and lower in London than in Berlin, (3) that the advan- tage of Paris over London has become greater since 1898, (4) that the New York rates are higher than even the bank rates in Europe, except in 1897-1900 and 1908-09, when they are exceeded by the rates in Berlin. A comparison between the foreign rates on short-time loans and on govern- ment bonds shows that the latter average less than the bank rates and more than the market rates, except in Prance, where the yields upon rentes are higher even than the bank rates for the whole period, though not for the second decade. Biit the difference in stability is more striking and more important than the difference in average rates. The relative figures of Tables 27 and 28 show that market rates fluctuate much more than bank rates, and bank rates much more than bond rates. On the whole, however, the general trend of the fluctuations has been similar in the money and the investment markets. The most important differences are that short-time rates relaxed in 1891, while bond rates stiffened ; that short- time rates rose in 1893, while bond rates changed but little ; and that short-time rates rose more promptly after the years of depression and reached their highest points earlier in the years of prosperity. All the European rates show a higher level of fluctuation in 1900-09 than 1890-99 — though the difference in the case of French rentes is small. IV. The Prices of Shares in Business Enterprises 1. The Significance of the Prices of Stocks Business enterprises are not the subject of an organized business traffic, and we have no systematic data showing fluctuations in their prices as going concerns frorii year to year. As a substitute, however, we have abundant data concerning the prices of shares in joint-stock companies. The stock quotations used here, like the interest quotations, all come from a single market. But in the case of stocks this fact is not a serious objection. For, compared with the New York Stock Exchange, other American markets are insigniflcant in the number and importance of the securities dealt in, and in the magnitude of their transactions. More serious is the limitation of the available quotations to the prices of shares in transportation companies — chiefly railways. The number of indus- trial stocks regularly bought and sold on the market in every year since 1890 MITCHELL: BUSINESS CYCLES 171 is too small to make significant averages. Further, none but large business enterprises list their stocks in New York. As in all other cases of price data, therefore, we are forced to use a comparatively small number of quotations as representative of the general trend of the market. But once again the available material comes from that part of the business field most affected by business cycles. Whether the market prices of stocks in 100-share lots may be interpreted as showing accurately changes in the prices of the business enterprises concerned is highly questionable. If 1,000 shares in a railway which has 100,000 shares outstanding be sold at $80 per share on a given day, it does not necessarily follow that the whole proprietary interest could be sold (or bought) for $8,000,000. Indeed, it is seldom safe to infer the price for the total supply of any kind of goods from the current market price per unit. This fact is not troublesome in the case of commodities, labor, or loans because we are not interested in the prices of the total supply. But in the case of stocks we should like to know the changes in the prices at which enterprises as wholes could be bought outright. And that cannot be known except in the rare cases when such sales are actually made and the terms published. Hence we must content ourselves with taking the figures for what they are — prices of shares in business enterprises. The attitude of the stockholder toward the concern whose shares he has purchased is generally different from the attitude of the typical merchant or manufacturer toward the enterprise which he controls. Often the stock- holder's attitude is hardly distinguishable from that of the bondholder. He buys dividend-paying stocks as an income-producing investment, and knows little or nothing about the management of the business. Often the stockholder is a speculator pure and simple, who buys on margin with the intention of soon selling again, and who thinks little of dividends in comparison with the antici- pated change in the price of his shares. Often the stockholder combines these two attitudes. He buys outright stoclss which pay little or no income, and holds them perhaps for years in the anticipation that the increase in their price will ultimately make his speculative investment profitable. Sometimes the. stockholder, by himself or as a member of some coterie of capitalists, owns or seeks the control of the enterprise. In that case he may have the attitude of the entrepreneur of economic theory; that is, he may identify his business interests with those of the enterprise, and manage the latter for the profit upon operation. But his attitude may also be that of the promoter trying to sell out on advantageous terms, or that of the business buccaneer seeking a profit for himself at the expense of other parties at interest through stock-market manip- ulation, through contracts which are injurious to the enterprise but profitable to himself, etc. Finally, the stockholder is sometimes a man primarily inter- ested in some related or competing line of business, who desires representation upon the directorate in order to obtain early information of changes in policy or special favors for his other enterprises. 172 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA But, despite this diversity of interests among the buyers and sellers of stocks, the present and anticipated future profits of corporations are by far the most important single factor in determining the prices of their shares. Directly or indirectly, calculations dealing with these profits influence investors and speculators, controlling magnates and promoters, even business buccaneers and stockholders primarily interested in other lines of enterprise. Hence the course of the stock market is significant of the business community's hopes and fears for the future, as well as of its good or ill fortune in the present. Even though the figures do not represent accurately the prices of business enterprises as units, they are therefore of great value in the study of business cycles. 2. Tables of the Relative Prices of American Common Stocks"^ The prices of stocks published by the Wall Street Journal and Dun's Review, while convenient records of daily and monthly fluctuations, are not well adapted for comparison with our tables of prices of labor and of com- modities at wholesale and retail. For these stock tables give average actual prices, and the preceding tables give average relative prices. Moreover, since some stocks have prices many times as high as other stocks, the objections which have led to the disuse of average actual prices of commodities sold in high-priced and low-priced units apply, though in less degree, to average actual prices of stocks. On the other hand, the one true index number of American stocks — computed by John R. Commons and N. I. Stone"^ — is based upon average actual prices in 1879-89, gives results by fiscal years, and ends with 1900-01, while the preceding tables are based upon average actual prices in 1890-99, give results by calendar years, and extend at least to 1907. To deter- mine the relations between the fluctuations in prices of different orders, it is accordingly necessary to make a table showing the relative prices of stocks on the basis of average actual prices in 1890-99. The data for this table were obtained from "Prices of Stocks at the New York Stock Exchange" published annually in the Financial Review. These tables give the highest and lowest prices of each stock quoted each month — a sufficient body of quotations to be representative. All the railroads were included which had approximately complete and regular records for the twenty years 1890 to 1909. Several important lines, such as the Burlington, Lake Shore, Michigan Central, and Northern Pacific, were omitted because quota- tions were scanty or altogether lacking for several years. The Alton and the 0* Most of the material wMeh follows was first published in the Journal of Political Economy, May and July, 1910, under the captions, "The Prices of American Stocks, 1890-1909," and "The Prices of Preferred and Common Stocks, 1890-1909." »6 Quarterly Bulletin of the Bureau of Economic Sesearch, July and October, 1900. Eeprinted in summary in Final Beport oj the Industrial Commission, XIX, 29, 1101-1103. MITCHELL: BUSINESS CYCLES 173 Rock Island have undergone changes in organization which break the continuity of their quotations. In the eases of the Pullman Company and the Adams Express Company a similar break has resulted from stock dividends. Stock dividends which did not force quotations suddenly to a lower level, and the payment of assessments which did not raise quotations suddenly to a higher level, have been disregarded. If all stocks affected by such changes since 1890 were excluded, the remaining list would be short indeed. In railways under- going reorganization the prices of voting-trust certificates have been taken in lieu of the prices of shares. Thirty-five railways stocks were found which met requirements, and five express, steamship, and telegraph stocks were added to bring the number of series up to forty.°° TABLE 29 List of Stocks Included in the Following Tables, and Their Average Actual Prices in 1890-99 Average price per share in 1890-99 North Atlantic railways — • New York, New Haven and Hartford $207.90 New York, Ontario and Western 17.50 New York Central 107.40 Pennsylvania* 109.30 Erie 17.50 Anthracite Coal railways — Central of New Jersey 108.30 Delaware and Hudson 126.70 Delaware, Lackawanna and Western 154.40 Beading 26.50 Middle Western railways — Cleveland, Cincinnati, Chicago and St. Louis 47.90 Wheeling and Lake Erie 16.50 New York, Chicago and St. Louis 14.80 Wabash 8.70 Pittsburg, Cincinnati, Chicago and St. Louis 24.90 Canada Southern 52.70 Lake Erie and Western 18.30 Hlinois Central 100.80 Northwestern railways — Chicago, Milwaukee and St. Paul 79.20 Chicago and Northwestern 114.60 Chicago, St. Paul, Minneapolis and Omaha 51.40 Duluth, South Shore and Atlantic 5.80 Iowa Central ''•^O Minneapolis and St. Louis 19.60 Wisconsin Central 10.10 * The Pennsylvania Railroad is not quoted with regularity on the New York market until September, 1897. Figures for earlier years were accordingly made by taking double the price of $50 shares as quoted on the Philadelphia exchange. 66 The work of transcribing the quotations, casting the average actual prices in 1890-99 and computing and averaging the relative prices was done mainly by Mr. and Mrs. Otto Tinnemann, of Berkeley. 174 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE 29— (Concluded) List of Stocks Included in the Following Tables, and Their Average Actual Prices in 1890-99 Average price per share in 1890-99 Southern railways — Chesapeake and Ohio $20.80 Norfolk and Western 12.10 Louisville and Nashville 62.80 Missouri Pacific 41.40 Missouri, Kansas and Texas 13.10 Texas and Pacific 12.30 Pacific railways — Atchison, Topeka and Santa Pe 21.60 Denver and Rio Grande 14.90 Southern Pacific 26.20 Union, Pacific 29.30 Canadian Pacific 74.40 Express, steamship, and telegraph companies — American Express Company 119.20 United States Express Company 51.60 Wells-Fargo Express Company 124.20 Pacific Mail Steamship Company 30.40 Western Union Telegraph Company 86.90 Table 29 shows what stocks were used, and gives the prices which stand for KJO. Tlie list is a representative one, including railways in all parts of the country ; railways which underwent reorganization in the nineties and railways which have suffered no financial disasters; raihvays whose stocks have long been upon an investment basis, and railways whose stocks have been a football of speculation ; railways whose shares command high, medium, and low prices ; railwa}^s which belong to almost all the great systems of the day. Tables 30, 31, and 32 present the arithmetic means of the relative prices of this list of stocks by years, quarters, and months, respectively."^ In order to make the record more useful, the monthly table has been supplied with certain data which aid in accounting for the fluctuations. In marking the "turning points" I have neglected minor movements, and paid attention to the mean between the highest and lowest prices, rather than to either extreme. The number of shares sold on the stock exchange is given as an indication of the waxing and waning volume of speculation. The average interest upon call «' Many discrepancies of one point appear between the relative prices by years and the averages of the relative prices by quarters; or between the relative prices by quarters and averages computed from the figures for the months included. They result from dropping fractions less than one-half, or carrying fratcions of one- half or more. The two or three cases of wider discrepancy — for example, in 1890 — are caused by the lack of quotations for some one stock for several months. The averages for quarters and years, in other words, have been computed directly from average actual prices — not from the relative prices by months. The figures for ' ' low ' ' and ' ' high ' ' in the table by months are not the extreme relative prices of the single stocks which showed the widest fluctuations; but arithmetic means of these extremes for forty stocks. In the tables by quarters and years the "low" and "high" figures are similar arithmetic means based not on the highest or lowest quotations for any single month, but on averages of the highest and lowest quota- tions for all three, or all twelve, of the months included. MITCHELL: BUSINESS CYCLES 175 loans is computed from the average stock-exchange rates by weeks."' The net imports or exports of gold are taken from the Reports of the Treasurer of the United States.^" Finally, the list of current events affecting the stock market has been compiled from the monthly digest of business history published in the Financial Review. Of course this list is necessarily incomplete, and the events mentioned are stated with such brevity as to mean little in some cases to readers who have not fresh in mind the business and political developments of the last twenty years. The purpose is merely to suggest the causes of the many short- period oscillations, which are so striking a feature of the stock market. TABLE 30 Eelative Prices op 40 Transportation Stocks. By Years, 1890-1911 Average actual prices in 1890-99 = 100. Arithmetic means Year 1890 Low 115 High 127 Spread 12 Averag 121 1891 107 119 12 113 1892 117 128 11 123 1893 87 100 13 93 1894 77 86 9 82 1895 80 91 11 85 1896 73 82 9 77 1897 79 88 9 84 1898 89 99 10 94 1899 121 136 15 128 1900 126 141 15 134 1901 196 225 29 211 1902 239 261 22 250 1903 189 212 23 201 1904 183 201 18 192 1905 239 260 21 250 1906 256 279 23 267 1907 192 216 24 204 1908 191 212 21 201 1909 266 288 22 277 1910 243 265 22 254 1911 241 256 15 248 Averages 1890-99 95 106 11 100 1900-09 208 230 22 219 •58 In making this computation, each week was assigned to that month in which the majority of its days fell. The source of both sets of data is the Financial Review. 68 Save for September, 1905, when the Treasurer's Beport gives a wrong figure, and for October to Decem- ber 1909. Data for these months are from the Monthly Summary of Commerce and Finance. The figures ex- clude gold in the ore. 176 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE 31 Relative Pbicbs or 40 Tbansportation Stocks. By Quarters, 1890-1911 Average actual prices in 1890-99 ^ 100. Arithmetic means First quarter Second quarter Low High 126 138 Third quarter Fourt Low 96 h quarter — ^ . Year 1890 Low 121 High 131 Low 123 High 133 High 113 1891 102 112 103 114 104 121 117 130 1892 121 133 118 127 117 126 114 124 1893 108 120 90 103 70 85 79 92 1894 80 88 79 87 75 84 76 83 1895 70 77 81 92 90 100 79 92 1896 76 85 76 83 65 74 75 85 1897 74 81 71 77 85 98 88 97 1898 87 98 87 94 93 101 94 106 1899 115 131 117 131 126 140 124 141 1900 125 138 126 140 121 130 133 156 1901 167 193 194 237 204 234 219 238 1902 228 244 240 259 255 280 233 261 1903 235 254 197 221 162 192 163 179 1904 170 187 164 174 182 200 213 239 1905 235 257 225 249 244 262 253 273 1906 260 284 244 273 257 279 261 282 1907 224 256 199 219 193 212 153 179 1908 158 180 181 202 200 218 223 248 1909 245 268 267 287 274 292 278 301 1910 261 287 246 270 225 244 244 260 1911 245 261 250 263 237 256 235 248 Averages 1890-99 95 106 95 105 95 106 94 106 1900-09 205 226 204 226 209 230 213 236 MITCHELL: BUSINESS CYCLES 177 L/DRARY TABLE 32 Relative Prices of 40 Transportation Stocks. 1890 January Relative prices of stocks • Turning Low High Spread points 125 134 9 By Months, 1890-1911 Average actual prices in 1890-99 = 100 Net imports Average ( + ) or exports Millions call-loan ( — ) of gold of shares rates in millions sold % of dollars AUG 9 1944 DEFT. OF AGRIC. ECON. February 121 131 10 6.4 5.2 March 101 108 3.6 7.70 4.25 2.88 + .6 + March 119 128 9 4.5 4.25 + .2 April 121 133 12 5.1 4.30 — .6 May 133 145 12 Max. 11.1 4.88 June 131 141 10 5.4 4.75 — 3.3 July 129 136 7 3.0 4.60 —10.7 August 125 135 10 4.1 11.63 — .4 September 118 131 13 5.1 6.75 + 1.1 October 109 123 14 7.2 5.00 + 2.2 November 92 116 24 9.1 7.00 + 1.4 December 92 106 14 Min. 5.1 5.00 + 5.4 January 101 114 13 5.6 3.90 + •■? February 105 113 8 3.3 2.88 — 3.4 4.5 April 104 117 13 Max. 7.2 3.30 —13.9 May 105 116 11 6.3 4.38 —30.4 June 100 111 11 4.0 3.25 —15.5 July 98 107 9 Min. 3.2 2.20 — 5.6 August 99 121 22 5.8 2.13 + 1.2 September 114 134 20 11.2 4.50 + 7.1 October 119 131 12 6.7 4.25 +16.1 November 113 125 12 5.3 4.38 + 8.5 December 118 132 14 6.8 2.94 + 5.8 1892 January 121 135 14 Max. 10.0 2.40 + .3 February 120 133 13 11.4 2.00 — 3.7 March 120 131 11 8.9 2.00 — 3.2 April 120 129 9 6.8 2.00 — 7.0 May 118 127 9 6.2 1.50 — 3.3 June 116 125 9 Min. 5.4 1.40 —16.6 July 117 128 11 3.6 1.88 —10.2 Current events affecting the stock market Reading announced inability to pay interest on preferred income bonds; difficulties of Sixth National Bank Eeduction of surplus reserve of banks; rate-cut- ting by railways Irregular market; small corner in Beading Silver-purchase law in prospect; large railway earnings Speculative interest keen; extra dividends by Pennsylvania and Big Four Foreign buying declined ; money in London firmer ; fear of gold exports; speculative spirit damp- ened Silver-purchase law approved; London selling American rails Gold exports; tight money; London selling Amer- ican rails Treasury relief in money market, by purchase of bonds Continuation of selling on London account Baring crisis in London; financial failures in N. T. ; issue of clearing-house loan certificates Improvement toward end; Morgan's "harmony meeting" of railway presidents; strong report of Vanderbilt roads; bank surplus restored Recovery aided by relaxation of strain in money market Market dull, waiting till doubts about financial legislation should be set at rest by adjournment of Congress Foreign situation unfavorable; state legislation hampering railways feared Favorable crop prospects Gold exports discouraging; no foreign buying Market very dull on continued exports of gold End of gold exports on the 25th Large harvests at home assured; serious shortage abroad; sharp advance Buoyancy continued until 24th; then market de- clined on profit-taking sales and reports that the Goulds opposed further rise Financial troubles reported in Paris and Berlin; failure of Maverick National Bank; railway earnings heavy Decided improvement after middle of month; large earnings continued Market awaiting developments Large earnings and bright prospects; money abundant; selling on foreign account Eeading lease of Lehigh Valley and Jersey Central railways Market dull; rumors of combinations; merchandise imports exceeding exports; House rejected free- silver bill Dullness continued; no important change, save the increase in gold exports Business largely in specialties; heavy floods in West and South Eeceivers appointed for Eichmond Terminal Free-coinage bill passed by Senate, defeased is Bouse 178 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 32— (Continued) Eelative Prices of 40 Transportation Stocks. By Months, 1890-1911 Average actual prices in 1890-99 = 100 Eelative prices of stocks Millions of shares sold 5.4 6.9 7.0 Average call-loan rates % 2.05 4.13 5.63 Net imports ( + ) or exports ( — ) of gold f 1892 August September October Low 120 114 119 High 130 123 127 Spread 10 9 8 Turning points Max. in millions of dollars — 5.7 — 2.3 + 2.6 November December 114 111 125 120 11 9 5.8 8,4 5.15 6.81 + 1.4 —11.3 1893 January February March April 113 107 102 103 125 122 113 115 12 15 11 12 10.6 10.7 7.4 6.3 4.00 3.00 8.20 4.88 —12.2 —13.0 — 1.5 —18.3 May 87 103 16 9.0 3.60 —15.2 June 81 94 13 4.8 8.88 — 1.7 July August 66 68 87 81 21 13 Min 5.9 4.9 7.75 5.50 + 5.8 + 40.6 September 76 88 12 4.7 3.75 + 5.2 October 78 93 15 6.3 2.38 + 1.1 November 83 91 8 Max. 5.5 1.70 + 4.1 December 76 91 15 4.9 1.16 — 1.9 1894 January February 77 81 87 86 10 5 Min. 4.5 3.2 1.02 1.00 — .6 — 1.1 March 83 91 8 4.8 1.09 — 2.9 April 85 93 8 Max. 4.0 1.13 — 9.4 May 78 86 8 4.8 1.10 —23.1 June 74 81 7 3.4 1.00 —22.4 July 72 78 6 Min. 2.8 1.00 —12.8 August 74 88 14 5.0 1.00 — 1.9 September 80 88 8 Max. 4.1 1.00 + .4 October 76 85 9 3.9 1.00 + .5 November 76 85 9 4.5 1.03 + 1.5 December 75 81 6 4.1 1.44 — 9.4 Current events affecting the stock market Beading lease annulled ;. industrials buoyant Cholera ' ' scare ' ' in New Tork Beading acquired interest in Boston and Maine and control of New York and New England Cleveland elected president Death of Jay Gould; stringent money maTket Activity in industrials Beading receivership Money market stringent. Industrials suffered Gold reserve fell below $100,000,000 ; bank failures in Australia National Cordage receivership; bank failures in western states and in Australia; stock ex- change panic May 4 and 5 Panic spread; extra session of Congress called; four minor railway receiverships Bank failures in West; Erie receivership Premium on currency; House passed bill repealing silver-purchase act; three railway receiverships, including Northern Pacific Premium disappeared; money market easier; four railway receiverships, including Wisconsin Central Senate passed silver-purchase repeal law October 30; six railway receiverships, including Union Pacific Money redundant in New York; heavy demand for high-grade bonds; two railway receiverships Four railway receiverships, including Santa Fe and New York and New England Erie reorganization plan House passed tariff bill ; Treasury sold $50,000,000 bonds to protect reserve; one railway receiver- ship Cleveland vetoed seigniorage coinage bill; two rail- way reorganization plans; gold reserve above $100,000,000 Coxey's army; coal strike; Great Northern strike; one railway receivership; New York and New England reorganization plan Gold reserve fell below $100,000,000; railway rate wars; floods; Pullman strike Coal strike settled ; American Eailway Union strike began; Santa Pe reorganization plan; Southern Bailway organized Railway strike riots in Chicago; Senate passed tariff bill; deadlock between the two houses; gold reserve $55,000,000 Tariff bill became law; shortage of corn crop an- ticipated; Minneapolis and St. Louis reorgani- zation plan Reading reorganization plan; corn reports still worse; moderate revival of general business Low price of coal reacted on anthracite railways; Duluth and Winnipeg receivership Treasury sold $50,000,000 bonds to recruit gold reserve; one railway receivership; Populist losses in Congressional elections Cleveland's message declared for maintenance of gold payments; large exports of gold caused uneasiness MITCHELL: BUSINESS CYCLES 179 TABLE 32— (Continued) Relative Prices or 40 Teanspoktation Stocks. By Months, 1890-1911 Average actual prices in 1890-99 = 100 Relative prices of stocks Millions of shares sold Average call-loan rates % Net imports ( + ) or exports (— ) of gold in millions of dollars r Low High Spread Turning points 1895 January 70 78 8 3.2 1.35 —24.7 February 70 76 6 Min. 3.0 1.50 + 4.1 March 69 78 9 5.1 2.25 + 4.1 April 75 85 10 5.0 2.25 + 2.0 May 80 95 15 8.9 1.32 + 3.3 June 86 96 10 6.0 1.16 + 2.0 July 89 97 8 5.8 1.40 — 3.3 August 90 100 10 5.3 1.03 —15.1 September 91 102 11 Max. 6.8 1.56 —16.7 October 88 98 10 5.3 2.17 — .1 November 82 90 8 5.0 1.97 —13.5 December 66 89 23 Min. 6.9 4.56 —14.2 1896 January 71 83 12 4.5 4.90 — .2 JPebruary 79 87 8 5.2 3.94 + 9.4 March 77 84 7 4.6 3.50 + .3 April 78 90 12 Max. 4.1 3.02 — 2.7 May 77 82 5 2.8 2..53 —18.5 June 75 84 9 4.4 1.94 — 6.1 July 66 76 10 ■ 5.6 2.07 —10.4 August 61 70 9 Min. 4.3 4.69 + 2.1 September 68 77 9 4.6 5.45 +34.1 October 70 80 10 4.9 11.13 + 27.6 November 79 90 11 Max. 5.9 6.25 + 6.9 December 75 84 9 3.9 1.95 + 2.2 Current events affecting the stock market Congress defeated administration measures to de- fend gold reserve, which fell to $45,000,000 Treasury contract with Morgan-Belmont gold synd- icate; Norfolk and Western receivership; an- thracite coal trade demoralized Syndicate loan restoring confidence; presidents of anthracite roads met, seeking to control demor- alization of coal trade Business revival; Santa Pe reorganization plan; buying on European account Extensive European buying; conflicting crop re- ports; speculation in wheat Less foreign buying; business revival extended; ' ' boom ' ' in iron trade ; better crop prospects ; syndicate loan completed Gold exports resumed; favorable business and crop conditions; attempts to effect agreement for maintenance of railway rates Bright crop prospects affect gold exports; Erie reorganization plans; marked rise in commodity prices Fall on the 13th, caused by heavy gold export, fol- lowed by recovery on reassuring announcements by the gold syndicate Cotton crop short; speculation for rise checked exports ; break in ' ' Kaffirs ' ' in London and Paris; Eastern Question caused selling on Euro- pean account European bourse panic on the 9th; heavy gold exports; reaction in business; decline in com- modity prices Cleveland's Venezuela message on the 17th caused panic on the stock exchange; new bond issue for gold reserve impending Popular loan for $100,000,000 announced on 6th; Venezuela "war scare" died out; anthracite railway agreement Loan subscriptions $527,000,000 ; Baltimore and Ohio receivership ; Senate resolutions recogniz- ing Cubans as belligerents House accepted these resolutions; heavy mercantile failures ; severe storms Buying for European account; president took no action upon Cuban resolutions Silver men captured many Democratic state con- ventions; business depressed; St. Louis tornado on 27th Silver men defeated in Republican convention ; con- tinued gains in Democratic state conventions Bryan's nomination; gold reserve reduced to less than 90 millions; banks aided Treasury by ex- changing gold for legal tenders Lowest points reached between 7th and 11th; ad- vance after Bryan's Madison Square meeting; gold imports began late in August Gold Democratic convention; large Republican pluralities in Vermont and Maine; rise in price of wheat Increasing confidence in Bryan's defeat; stringent money market caused by hoarding gold ; Western Freight Association formed McKinley elected on 3rd; sharp advance followed by reaction on profit-taking sales, small earnings of spring-wheat roads, etc. Senate discussing resolution recognizing independ- ence of Cuba; heavy bank failures in the West ISO MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 32— {Continued) Relative Prices or 40 Transportation Stocks. By Months, 1890-1911 1897 January rebruary March Relative prices of stocks * \ Turning Low High Spread points 76 83 7 74 79 Average actual prices in 1890-99 ^ 100 Net imports Average ( -j- ) or exports Millions call-loan { — ) of gold of shares rates in millions sold % of dollars 3.4 1.78 + .2 72 81 2.8 5.0 1.63 1.62 + .3 April 69 75 6 Min. 3,6 1.50 — 6.0 May 70 74 4 3.3 1.41 — 8.9 June 73 81 8 6.4 1.20 — 7.0 July 78 88 10 6.9 1.19 — 4.9 August 85 101 16 11.4 1.25 + 2.4 September 92 107 15 Max. 13.1 2.22 + 4.1 October 90 101 11 8.0 2.50 + 11.0 November 85 95 10 Min. 5.8 1.81 + 1.8 December 90 97 7 7.5 2.92 + 1.5 1898 January 91 101 10 Max. 9.3 2.50 + 3.1 February 88 101 13 9.0 1.78 + 4.3 March 82 93 11 10.1 2.17 +29.6 April 83 89 6 Min. 6.0 2.97 + 31.0 May 87 97 10 9.2 1.95 + 13.0 June 94 101 7 Max. 9.2 1.25 + 2.8 July 92 98 6 Min. 4.8 1.25 + 1.0 August 93 104 11 Max. 12.1 1.70 +13.1 September 94 101 7 9.4 3.78 + 13.4 October 93 100 7 Min. 7.5 2.25 + 15.0 November 92 103 11 11.0 2.10 + 3.8 December 100 118 18 15.3 2.41 + 6.9 Current events affecting the stock market Eaihvay earnings low; anthracite and bituminous coal carriers affected by demoralization of coal trade Steel-rail pool collapsed; large purchase of print cloths; renewed discussion of Cuban affairs in Senate Trans-Missouri Freight Association held illegal; Lake Shore refuniied 7 per cent bonds at 3% per cent; extra session of Congress for tariff legislation Graeco-Turkish war; floods in Mississippi Valley; N. Y. Central refunded bonds Senate resolution recognizing Cuba as a belliger- ent; Supreme Court denied right of Interstate Commerce Commission to fix rates Marked improvement in crop situation, followed by rise of Granger stocks; Chicago and Northwest- ern refunded bonds Dingley tariff passed; bituminous coal strike; crops excellent at home, seriously short abroad; Klondike gold rush ' ' Boom ' ' on stock exchange, due to crop situation and revival of business Reaction in latter part of month on profit-taking sales ; rumors of war with Spain ; yellow fever in the South; coal strike ended Recession of speculation; renewed fears of war with Spain Break on 5th caused by fears of war with Spain; recovery on good railway earnings, and end of yellow fever Meeting of Congress caused little disturbance Merger of Lake Shore and Michigan Southern with N. Y. Central reported The ' ' Maine ' ' sunk by explosion in harbor of Havana; industrial consolidations Market fluctuating on conflicting rumors of war with Spain; industrial consolidations War began on 21st ; investment buying almost ceased; more industrial consolidations Battle of Manila Bay on 1st; crop prospects ex- cellent Leiter wheat corner collapsed; Baltimore and Ohio reorganization plan; several increases of railway dividends Battle of Santiago Bay on 3rd; peace overtures on 26th; low price of wheat; grain movement light Peace protocol signed on 12th; granger stocks rose on wheat prospects; coal shares fell on condition of trade Fears of monetary stringency; break in prices of industrials; Federal Steel Company formed with capital of 200 milUons Pashoda incident threatened rupture between Eng- land and France; coal, cotton, woolen, and leather trades unsatisfactory Republican gains in elections; Fashoda incident settled; Spain agreed to cede Philippines; mone- tary stringency in Berlin Peace treaty signed on 10th; coal and cotton trades improved; railway dividends increased MITCHELL: BUSINESS CYCLES 181 TABLE 32— (Continued) Relative Prices op 40 Transportation Stocks. By Months, 1890-1911 1899 January February March April May June Relative prices of stocks Turning Low High Spread points 110 132 22 118 133 15 Max. 118 129 11 118 133 15 117 131 U 115 129 14 Min. July 124 134 10 August 128 144 16 September 129 142 13 October 127 140 13 November 132 143 11 December 114 139 25 Average actual prices in 1890-99 = 100 Net imports Average ( + ) or exports Millions call-loan ( — ) of gold of shares rates in millions sold % of dollars 24.3 2.72 + 4.1 16.1 2.47 + 4.3 17.7 4.10 + 1.7 17.0 5.13 + 1.0 15.0 3.52 + .6 10.9 2.63 —18.2 8.4 4.47 — .2 13.0 3.27 + .6 12..5 6.38 + 1.5 10.9 7.50 + 5.5 13.7 17.1 11.13 + .9 7.0 Current events affecting the stock market Great ' ' boom ' ' on stock exchange ; enormous industrial consolidations; railvcay rate situation improved; dividend increases Speculation subsided; unfavorable news from Philippines; severe storms Industrial consolidations continued; great rise in iron and steel prices; speculation in industrials; disquieting news from Samoa Break in industrials, followed by rally Panic in industrials after death of Flower on 12th; $20,000,000 indemnity paid to Spain Industrials in disfavor; railways gained after a weak opening on improved crop prospects and larger earnings Gain continued on favorable reports of earnings and crops; numerous strikes Easier money, declining foreign exchange, active trade, expanding earnings, increasing dividends, assurance of large corn crop Tight money and prospect of war between England and the Transvaal affected the market Boer war began; Bank of England rate raised from 3% to 5 per cent; tight money in New York; advances in railway rates Early weakness because of tight money; later strength on Treasury purchases of bonds; Bank of England rate 6 per cent Stock exchange panic on 18th; London markets disturbed by military reverses ; financial diffi- culties in Boston from decline in copper stocks; failure Produce Exchange Trust Co. in New York; recovery after the 22d 1900 January 122 134 12 February 125 137 12 9.8 10.2 4.15 2.25 4.2 + .1 March 127 144 17 14.4 3.94 + .5 April 132 148 16 Max. 14.8 3.06 + 1.0 May 126 138 12 9.5 2.00 — 9.1 June 119 134 15 7.3 1.69 — 6.8 July 123 133 10 6.2 1.53 + 2.2 August 124 131 7 4.0 1.30 —15.6 September 117 127 10 Min. 5.2 1.61 + 2.7 October 123 140 17 10.9 3.57 -f 8.8 November 133 154 21 22.6 5.06 -f 9.5 December 144 175 31 23.4 5.13 + 2.5 Activity of business; large railway earnings; ad- vances in freight rates by changes in classifi- cation; larger dividends Early advance on increased dividends; later reac- tion on decline of street railway and industrial stocks Gold-standard act, followed by foreign buying; street railway troubles ended American Steel and Wire Co. on 16th closed several mills, because of failing demand; confidence undermined Uncertainty about course of industry; reaction in trade more marked Unfavorable crop reports; continued reaction in trade; Boxer troubles in China Better weather for the crops; Bryan nominated for presidency by Democrats Extreme dullness, because of presidential campaign Galveston disaster; anthracite coal strike; uneasi- ness about campaign Settlement of coal strike; more confidence in Bryan's defeat; gold imports McKinley's election followed by a great outburst of speculation; increased dividends "Boom" extended on Morgan's purchase of Penn- sylvania Coal Co. for Erie, and rumors of "com- munity of interest ' ' plans 182 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE 32 — (Continued) Kelative Prices or 40 Teanspoetation Stocks. Average actual prices in 1890- 1901 January Relative prices of stocks ^ Turning Low High Spread points 157 181 24 Millions of shares sold 30.3 February 167 188 21 21.9 March 175 210 35 27.1 April 196 229 33 41.7 Max. and May 169 239 70 Min. 35.3 June July 215 242 27 Max. 197 234 37 Min. August 205 231 26 September 209 238 29 October 212 232 20 November 224 242 18 Max. December 219 238 19 Min. 19.8 16.0 16.8 Net imports Average ( + ) or exports call-loan ( — ) of gold rates in millions % of dollars 3.07 — 4.7 2.00 2.34 4.30 6.88 4.31 6.25 + 1.0 + 1-2 — 3.4 — 9.2 — 2.6 4.30 — 1.5 10.8 2.44 + 2.4 14.0 4.34 + 6.5 14.0 3.55 + 1.0 18.3 4.19 —11.3 — 3.1 By Months, 1890-1911 = 100 Current events affecting the stock market Speculation culminated on Morgan's purchase of Central of New Jersey for the Beading; mod- erate reaction after the 9th U. S. Steel Corporation launched; Union Pacific bought control of Southern Pacific Marked success of steel ' ' flotation ' ' ; rumors of further combinations High tide of speculation; many rumors of further combinations; Texas oil fever Northern Pacific panic on the 9th; no failures; recovery late in month Early strength lost on suspension Seventh National Bank; failure H. Marquand & Co.; bank fail- ures in Germany Poor bank statement; steel workers' strike; dam- age to crops by drought; threatened rate reduc- tion by Santa Fe, etc. Crop prospects somewhat improved; steel strike thought to be failing McKinley's assassination and death caused sharp declines; recovery prompt on settlement of steel strike, rumors of mergers, etc. Industrials fell, railways rose on rumors of merg- ers, or communities of interest, and increased dividends Effect of formation of Northern Securities Co. off- set by break in copper stocks and fears of tight money Amalgamated Copper Co. gave over attempt to hold copper at 17 cents; tight money; market stronger late in month 1902 January 223 241 18 February 229 246 17 March 232 245 13 April 236 261 25 May 239 258 19 June 246 260 14 July 249 268 19 August 259 284 25 September 258 289 31 Max. October 245 273 28 November 232 261 29 December 222 252 30 Min. 14.8 4.57 — 1.2 13.0 2.38 — 7.7 12.0 3.94 — 2.8 26.6 5.10 — 1.9 13.5 5.56 — 1.2 7.8 2.84 + .4 16.4 3.52 — 7.0 14.3 3.78 — 1.4 21.0 10.80 -1- 2.0 16.4 17.1 15.7 7.63 4.88 6.81 + 7.2 + 2.3 — 1.5 Several industrial combinations in difficulty; large new stock and bond issues Severe snowstorms; government began proceedings against Northern Securities Co. Market continued to hold its own despite labor troubles and bad weather Eampant speculation and clique manipulation; public not prominent in the market; Morgan's steamship combination announced Collapse of "Webb-Meyer Securities"; anthracite coal strike; three stock exchange firms failed Eailway dividend increases; industrial dividend reductions; peace in South Africa Crop indications favorable; Eock Island Co. plan ill received; gold exports depressing at end of month Excellent crop prospects outweighed coal strike and increasing firmness of money market Severe break in prices at end of month ; liquidation induced by high money rates and calling of loans by banks Appointment of coal strike commission and easing of money market caused rise; later fall on new labor troubles and fears of gold exports Forced liquidation by pools; bank accommodation difficult to secure Eenewed liquidation due to monetary tension; later buoyancy on formation of $50,000,000 money pool MITCHELL: BUSINESS CYCLES 183 Eelative Prices Relative prices of stocks 1903 January Low 243 High 260 Spread 17 Turning points Max. February 241 258 17 March 222 245 23 April 210 230 20 May 199 227 28 June 180 207 27 July 168 201 33 August 159 191 32 September 159 184 25 October 158 175 17 Min. November 161 175 14 December 171 187 16 1904 January 176 192 16 Max. February 166 184 18 March 163 179 16 April 168 177 9 May 161 170 9 Min. June 163 172 9 July 170 185 15 August 179 202 23 September 195 211 16 October 205 230 25 November 216 243 27 December 217 244 27 TABLE 32— (Continued) OF 40 Transportation Stocks. By Months, 1890-1911 Average actual prices in 1890-99 =: 100 Net imports Average { -j- ) or exports Millions calMoan ( — ) of gold of shares rates in millions sold % of dollars Current events aifecting the stock market 16.0 10.9 15.1 12.3 12.5 15.4 14.9 14.4 10.8 12.9 10.7 15.2 12.3 8.8 11.4 8.2 5.3 5.0 12.5 12.5 18.8 32.6 32.0 28.1 5.75 + .8 Buoyancy for ten or twelve days, followed by reaction; marked irregularity in movements of different stocks 2.88 — .5 "Anti-trust" legislation — Bureau of Corporations established; Elkins law, law expediting hearings under Sherman anti-trust law, etc. 6.00 -(- 2.7 Liquidation — labor troubles, increased operating expenses, failure of Aldrich financial bill, dis- sensions in large corporations 4.19 — .9 Prices broke on 13th on Northern Securities decis- ion; later rallied on winter wheat prospects, etc. 2.44 — 13.7 Liquidation renewed; many strikes; iron trade depressed, cotton speculation; stock panic in Montreal 3.05 — 10.5 U. S. Shipbuilding Co. receivership; large gold ex- ports; failures in Canada; floods in Southwest; drought in North 2.50 — 6.7 Stock exchange failures; cotton corner 2.03 -f- 3.2 Two more failures on stock exchange; rally after 10th on shifting of holdings to stronger hands; corn and cotton crops late 2.32 + 1.6 Further liquidation; reports of crop damage; cuts in iron and steel prices; labor troubles; industry depressed 2.69 + 1.9 Low prices tempted buyers, despite bank troubles in Baltimore, Pittsburg, and St. Louis; depres- sion in iron trade, etc. 5.19 + 7.7 Advance latter part of month; large cotton ship- ments and engagements of gold for import; bond market improved 5.50 +14.6 Further large bond issues; tone distinctly more hopeful 2.34 + 6.7 Strong bond market; severe storms hampered rail- ways ; wild speculation in cotton and coffee 1.81 + 3.2 Eusso- Japanese war; Baltimore fire; break in cotton market; speculation in wheat 1.75 + 5.0 Northern Securities decision by Supreme Court followed by rise; disagreement of Hill and Har- riman interests; Sully failed 1.38 — 9.9 Hill-Harriman litigation; backward spring, gold exports, poor railway earnings 1.55 — 33.2 United States paid for Panama Canal; uncertainty regarding wheat crop 1.13 + 2.7 Else latter part of month on better crop prospects ; settlement of strike on Great Lakes; end of gold exports 1.03 -f- 7.5 Parker nominated for president by Democrats; better crop prospects; strikes in packing indus- try, building trades, etc. .90 — 3.8 Market stronger, despite cutting of iron and steel prices, reports of damage to wheat crop, rise of cotton, etc. 1.53 + 1.1 Iron demand revived on further price reductions; several strikes ended; crop prospects uncertain; industry reviving 2.03 + 3.7 Industrial revival extended; good crops assured; marked buoyancy on stock exchange 2.80 — 16.7 "Boom" in stocks followed Roosevelt's election; industrial revival continued to gain ground 3.13 — 10.9 Market broke on 6th and 13th under attacks by Lawson and president's message; prompt re- action 184 MEMOIRS OP THE UNIVERSITY OP CALIFORNIA TABLE 32— (Continued) Relative Prices of 40 Tbanspoetation Stocks. By Months, 1890-1911 Relative prices of stoclcs , * \ Turning Low Higli Spread points 1905 January 225 248 23 February 238 257 19 March 243 264 21 Max. April 229 261 32 May 220 241 21 Min. June 223 242 19 July 237 250 13 August 244 268 24 September 252 266 14 October 253 270 17 November 251 272 21 December 255 278 23 1906 January 265 294 29 Max. February 260 283 23 March 255 274 19 April 246 276 30 May 239 270 31 June 247 271 24 July 243 263 20 August 258 286 28 September 270 287 17 Max. October 264 285 21 November 261 280 19 December 259 281 22 Average actual prices in 1890-99 = 100 Net imports Average { 4- ) or exports Millions call-loan ( — ) of gold of shares rates in millions sold % of dollars 11.8 2.25 —15.7 Current events affecting the stock market Eumors of agreement between Hill-Harriman in- terests, and of combination of Union Pacific, Standard Oil, and Vanderbilt interests 10.6 2.19 — 13.4 Further rumors of impending combinations, ac- companied by heavy buying 12.9 3.20 -f 1.8 Eeaction on failure of rumored combina,tions to materialize, and on disappointment of hopes for peace between Eussia and Japan 12.7 3.25 + .4 Symptoms of friction among railways; break in wheat market; bank defalcations in Milwaukee; insurance scandals 12.1 2.42 -f- 1.3 Eeaction in iron trade; renewed attacks by Law- son; further insurance scandals; Pennsylvania bond subscriptions small 10.8 2.50 — 2.7 Improvement latter part of month on prospects of peace between Eussia and Japan; Eyan's pur- chase of Equitable stock; good crop reports 10.9 2.31 -f 2.9 Market rose on dividend disbursements and then fluctuated on crop reports; cotton statistics scandal 10.9 2.05 -j- 2.1 Peace between Eussia and Japan; iron trade buoy- ant; market broke on 30th and 31st under real- izing sales and attack by Lawson 10.9 3.56 + 3.0 Market recovered and advanced until checked by high rates for money toward close of month 12.6 5.31 + 9.7 Course of market irregular and uncertain 13.1 7.70 + 3.0 Market declined until 13th on dear money; Eussiau mutinies ; large Hearst vote in N. Y. ; later mar- ket rose on increased dividends 14.4 16.50 Buoyancy despite extreme tension in money mar- ket ; passing of dividend on preferred stock by Bock Island Co. ; failure of Walsh banks in Chicago As monetary stringency relaxed, market rose; later decline on profit-taking sales, and proposed in- quiry into restraint of trade House passed Hepburn rate bill; fear of coal strike; report of Armstrong Insurance Com- mittee, etc. Fear of monetary stringency; fear of coal strike; court decisions unfavorable to corporations San Francisco earthquake and fire; dear money; coal strike; sales of securities by fire insurance companies Coal strike ended; Garfield's report on Standard Oil; money easier Hepburn rate bill became law; Eeynolds-Neill re- port on Chicago stockyards; bond market dull Crop outlook highly favorable; money market re- turned to ease; U. S. Steel announced dividend on common stock July 31 31.8 4.44 + 6.2 Union Pacific and Southern Pacific dividends increased sensationally on 17th; "boom" fol- lowed; checked late in month Market weak and strong by turns; monetary stringency returning Irregularity continued; break on news of advance of Bank of England rate to 6 per cent on 19th Increase of Pennsylvania Eailroad dividend strengthened market early in month; later un- certainty on dear money 20.5 14.00 + 4.6 Tight money and announcement of large security issues offset effect of increased dividends 38.5 8.65 — 4.4 21.7 4.63 — 7.7 19.5 4.88 — 1.6 24.3 9.50 + 11.2 24.0 4.15 +27.9 20.3 3.25 — 1.8 16.3 2.97 + 7.0 26.0 9.38 +27.9 21.9 5.15 + 18.6 19.4 7.50 + 5.8 MITCHELL: BUSINESS CYCLES 185 Relative Pbices Relative prices of stocks ' ^; — r^ Turning Low High Spread points 1907 January 243 270 27 February 234 '252 18 March 193 243 50 Min. April 208 225 17 Max. May 194 219 25 Min. June 197 213 16 July 208 222 14 Max. August 183 211 28 Min. September 190 204 14 Max. October 151 192 41 November 149 169 20 Min. December 158 176 18 1908 January 163 186 23 Max. February 150 169 19 Min. March 158 182 24 April 171 191 20 May 184 213 29 June 192 207 15 July 196 216 20 August 204 219 15 September 202 223 21 October 208 226 18 November 222 254 32 December 240 264 24 TABLE 32— (Continued) or 40 Transportation Stocks. By Months, 1890-1911 Average actual prices in 1890-99 = 100 Net imports Average ( + ) or exports Millions call-loan ( — ) of gold of shares rates in millions sold % of dollars 22.7 6.15 — .2 16.5 32.2 19.2 15.8 9.7 12.8 15.6 12.2 17.3 9.7 12.6 16.6 9.8 15.9 11.6 21.0 9.7 13.9 18.9 3.06 — 2.4 23.0 Current events affecting the stock market Further issues of securities; substitution of short- term notes for bonds; increased operating ex- penses; congestion of traffic 4.38 + 1.3 Further borrowing on short-term notes; Interstate Commerce Commission's investigation of the Harriman lines 6.38 + 2.0 Severe liquidation on the 14th and 25th; failure of Morgan 's attempt to arrange conference between Roosevelt and railway presidents 2.35 + 1.5 Money market relaxed; stock market recovered in a measure; unfavorable crop reports 2.31 — 2.9 Unseasonable cold made crops backward; diffi- culty in financing capital requirements continued 3.13 — 22.8 Bond syndicates expiring with large portion of bonds unsold; crop prospects somewhat brighter 4.55 — 5.1 Federal policy of asking for receivers in prosecu- tion of trusts announced ; intimations of dividend increases Standard Oil fine; numerous prosecutions of cor- porations; signs of industrial reaction; Pope receivership 4.00 + .2 Copper fell 22-15% cents per pound; extra divi- dend by Burlington; success of N. Y. City bond sale after interest had been raised from 4 to 4% per cent 21.00 — .1 Embarrassment of Heinze, Morse, and Thomas banks ; failure of Knickerbocker Trust Co. ; panic 12.25 +61.7 Panic continued ; limitation of payments by banks ; bargain buying of stocks in small lots 14.60 +42.5 Strain relaxed; decided gain on stock exchange in closing days of the mouth 4.75 + 9.4 Return of ease in money market; revival of con- fidence; Seaboard Air Line and Chicago Great Western receiverships 1.81 — .1 President's message and letter to Interstate Com- merce Commission judged unfavorable to cor- porate interests; more railway receiverships 1.85 + 1.1 President's message of March 25th judged more favorable; suspended banks reopening; copper prospects brighter 1.72 — 13.0 Successful financing of Erie's capital require- ments; railway expenses reduced 1.66 — 24.4 Congress adjourned without passing laws adverse to corporate interests; Gould stocks weak 1.52 — 6.2 Inactivity; cut in steel prices; dividend reductions and suspensions; Taft nominated 1.22 — 2.7 Bryan nominated; Court of Appeals reversed Standard Oil fine decision; efforts to increase freight rates 1.06 — 3.1 Advance of stocks opposed by "shorts"; flagrant manipulation followed by suspension of a large brokerage firm Uneasiness over presidential campaign; suspension of dividends by American Locomotive Co. Revival in iron and copper trades; net earnings increasing through saving of expenses Buoyancy followed Taft's election; moderate reac- tion on profit-taking sales, suit against ' ' Sugar Trust," etc. 2.90 — 3.3 Market irregular; advances in freight rates an- nounced; tariff hearings begun by Committee of Ways and Means 17.6 1.35 14.3 1.44 + .8 25.0 1.75 — 1.0 186 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 32— (Continued) Relative Prices of 40 Transportation Stocks. By Months, 1890-1911 Average actual prices in 1890-99 = 100 Relative prices of stocks January Low 247 High 271 Spread 24 Turning points Max. Millions of shares sold 17.3 February 240 266 26 Min. 12.3 March 248 267 19 13.7 April 260 284 24 19.1 May 270 286 16 16.5 June 273 294 21 Max. 20.3 J'uly 219 246 27 Min. 14.3 Net imports Average ( -j- ) or exports call-loan of dollars rates ( — ) of gold % in millions 1.81 2.25 1.85 1.94 1.84 1.87 2.41 - 5.5 - 6.4 -16.7 - 4.1 -10.1 - 7.2 July 274 288 14 Min. 12.8 2.06 —14.6 August 274 296 22 24.6 2.17 — 5.0 September 272 292 20 20.0 2.69 — 6.0 October 278 301 23 21.7 4.31 — 3.6 November 279 298 19 18.8 4.65 —13.1 December 284 307 23 Max. 17.6 5.03 — 9.4 January 262 298 36 24.5 4.72 — 4.0 February 252 275 23 Min. 16.0 2.78 + .1 March 268 289 21 Max. 15.0 2.88 + 2.6 April 254 277 23 14.1 3.28 —34.2 May 252 272 20 11.9 3.63 + 2.4 June 233 265 32 16.3 2.77 + 3.0 + 9.5 August 228 250 22 10.4 1.55 + 9.7 September 232 245 13 7.7 2.00 + 1.4 October 247 266 19 Max. 13.5 3.13 + 3.5 November 246 263 17 10.7 3.23 + 2.9 Current events affecting the stock market Consolidated Gas decision, maintaining legality of 80-cent rate, caused decUne; Harriman entered N. Y. Central board Steel Corporation announced new policy of "pro- tecting their customers ' ' on 19th ; heavy liqui- dation followed Congress in extra session on the tariff; iron, coal, and copper trades in difficulties Improved industrial conditions; larger purchases of bonds; increasing railway earnings Supreme Court decision on Commodities Clause of Hepburn act on 3d caused rise; expanding busi- ness activity Eeaction followed Taft's recommendation of tax on corporations; hitch in plan for listing Steel shares in Paris; poor state of copper trade Tariff nearing completion; increasing business activity; higher dividend on Steel common Tariff act signed on 5th; market fluctuated on conflicting rumors of Harriman 's health; crop prospects impaired by heat Harriman died on 9th; Taft's speeches caused decline in third week Early decline on dearer money in New York and London; foreign selling; later extensive rise Circuit Court found Standard Oil contravening Sherman Anti-trust Law on 20th; new stock issues depressing No disturbing features in Taft's message; specu- lation encouraged by rise of certain special stocks; general list buoyant after Christmas Taf t 's message recommending increase in powers of Interstate Commerce Commission, etc.; Hock- ing Coal and Iron Co. in hands of receivers; fall of cotton and grain prices; slackening activ- ity in steel trade Signs of declining activity in several industries; failure of Pisk & Robinson N. Y. Central dividend rate increased; numerous strikes and wage advances Bad crop reports; gold exports, dear money, inti- mations of further prosecutions of corporations Large foreign sales of railway securities; crop prospects better Injunction against advance of railway rates; In- terstate Commerce Commission reduces rates west of Missouri Injury to spring wheat; Interstate Commerce Com- mission secured postponement of advances in freight rates; further restriction of trade; Parquhar-Pearson securities taken over by Kiihn, Loeb & Co. Gains by ' ' Insurgents ' ' in state conventions ; furtner restriction of trade Minnesota rate decision favorable to railways; Democrats carried Maine; revival of demand for bonds Crops better than expected; Democratic success at elections forecasted; Bank of England raised rate to 5 per cent Democrats captured House of Representatives; federal suit against ' ' Sugar Trust ' ' ; pessimistic trade forecasts MITCHELL: BUSINESS CYCLES 187 TABLE 32— (Concluded) Relative Prices of 40 Teansportation Stocks. By Months, 1890-1911 Relative prices of stocl£s A Turning Low High Spread points 1910 December 243 255 12 Min. 1911 January 246 262 16 February 250 267 17 Max. Average actual prices in 1890-99 : Net imports Average ( + ) or exports Millions call-loan ( — ) of gold of shares rates in millions sold % of dollars 9.8 3.38 + 3.6 10.4 10.2 3.18 2.28 March 251 265 14 April 249 260 11 Min. May 249 263 14 June 259 271 12 Max. July 255 265 10 August 232 262 30 September 224 242 18 Min. October 232 246 14 November 238 253 15 5.5 15.0 17.4 10.9 2.36 2.31 2.28 2.33 + 8.6 + 5.4 6.8 2.28 + 3.6 5.6 2.30 + 3.0 11.1 2.31 — 1.8 10.5 2.40 + 1.7 + .4 + 3.6 + 2.4 + .1 December 240 252 12 Max. 14.9 2.72 —10.5 9.1 4.03 + 3.7 :100 Current events affecting the stock market Encouragement received from Taft's message to Congress and decision in Anthracite Coal cases ; further federal suits against corporations; addi- tional increases of wages by railways; continued restrictions of trade Carnegie Trust Co. closed; restriction of produotiop in leather and cotton trades; large loan flota tions by New York City and by railways; pros pects of steel trade better; net earnings of rail ways larger; money market easy Decline in commodity prices; several new railway loans; further improvement in steel trade; plan for double tracking Union and Southern Pacific announced; market broke on 24th after an- nouncement that Interstate Commerce Commis- sion refused to permit advance of railway freight rates N. Y. Central Railroad reduced dividend; railway net earnings lower; troops sent to Mexican bor- der; new orders in steel trade smaller; copper stocks larger; money market dull Congress met in extra session; further signs of reaction in general business; increasing demand for bonds ; rates for money very low Supreme Court decision in Standard Oil case fol- lowed by temporary revival of speculation; gen- eral cut in steel prices ; House of Representatives began investigation of U. S. Steel Corporation Sale of Panama Canal bonds highly successful; Government defeated in suit to separate South- ern Pacific from Union Pacific, but won suit against "Powder Trust" and began several new prosecutions under Sherman law; crops injured by dry weather Further damage to grain crops, and wild specula- tion for advance of prices; Interstate Commerce Commission's decision regarding Pacific Coast rates deemed unfavorable to railways; new trust prosecutions; anxiety over Moroccan crisis Supporting of prices apparently ceased on Stock Exchange; liquidation on European account; threatened labor difficulties for railways; prices of steel products weaker; new trust prosecutions Speeches by Taft and Wickersham threaten exten- sive prosecutions of trusts; uneasiness in Euro- pean markets; loans by New York to Paris and Berlin; Tripolitan war; price cutting in steel; Western railway strikes Federal suit against U. S. Steel Corporation; Wickersham approved plan of ' ' Tobacco Trust ' ' for reorganization; steel earnings larger; revo- lution in China; monetary tension in Europe relaxed; New York bought $13,000,000 Prussian treasury notes; money a drug Circuit Court approved plan for disintegration of "Tobacco Trust"; Commerce Court enjoined order of Interstate Commerce Commission in Pacific Coast rate cases; increased railway orders for steel products; financial conditions abroad easier; over $10,000,000 gold sent to Canada; New York reserves below 25 per cent Hadley Commission's report on railway securities well received; increasing orders for iron and steel; further trust prosecutions; receivers ap- pointed tor Wabash; rates for money somewhat firmer 188 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA MITCHELL: BUSINESS CYCLES 189 3. The Course of the New York Stock Market in 1890-1911 A sketch of the general trend of the market is useful in studying these tables. From 133-145'" in May of 1890 prices declined to 92-106 in ^December under European liquidation, stringent money, and the reflex influence of the Baring crisis in London. The first seven months of 1891 was a period of liquidation in the United States and stocks did not recover much of their lost ground ; but after the scantiness of foreign wheat crops and the abundance of the American crop had become assured, prices advaced, reaching 121-135 in January, 1892. For the rest of the year and the first four months of 1893 the market sagged under the influence of gold exports, the decline of the treasury's gold reserve, foreign selling, and the financial embarrassment of certain rail- ways and industrial corporations. In the stock market the crisis of 1893 began with a sharp panic on May 4 and 5. The lowest level touched in that disastrous summer was 68-81 in August. No material recovery occurred during the dull year 1894; but after President Cleveland made his contract with the Morgan- Belmont gold syndicate in February, 1895, stocks began to advance and reached 91-102 in September. The resumption of gold exports and the concurrent decline of the treasury's reserve again turned the tide and prices were falling when the president's Venezuelan message was published, December 17. The war scare which followed reduced stocks to as low a point as during the worst of the panic of 1893. The recovery of the next spring was checked by the gains of the free-silver party and Mr. Bryan's nomination. In August, 1896, while the issue of the presidential campaign seemed uncertain, stocks fell to their lowest point in the whole period of twenty-two years, 61-70. The defeat of the free-silver policy paved the Avay for a return of business prosperity. But this immediate advance did not outlast November, and for the next eight months stocks were lower than in the week of election. Finally, in midsummer, 1897, the development of a crop situation like that of 1891 caused a sudden advance to 92-107 in September. But fear of war with Spain brought on a relapse, and when fighting began in the next April the market stood at 83-89 — substantially the level of November, 1896. During the war the general trend of stock prices was upward, and peace was followed by a "boom" which carried prices to 118-133 in February, 1899. The next year and a half was a time of many vicissitudes upon the stock market in which industrial shares played the leading roles. But even the railway shares underwent a fall after ex-Governor Flower's death in May, 1899; scored a marked advance in midsummer ; suffered a heavy drop in the panic of December 18 ; made a new high record in April, and finished in September, 1900, lower than in February, 1899. 70 These figures show the arithmetic means of the lowest and highest relative prices for the month. 190 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA It is notable that in these years of business revival after the depression of 1893-96 stock prices did not equal the high record of May, 1890, until April, 1900. But the great outburst of speculation which followed President Mc- Kinley's second election turned the moderate rate of advance into a furious rush, and established what for twelve years has appeared to be a permanently higher level of fluctuations. From 117-127 in September, 1900, stocks rose with hardly a check to 239 in May. But May 9 brought the Northern Pacific corner and the market dropped to 169. The difference between these figures is 70 points — the widest spread exhibited by any month in the tAvo decades. This extraordinar)^ fall had but a transient effect upon the general level of prices. In June the high level of May was actually surpassed, and the general trend continued upward until September, 1902, when the figures stood 258-289. The period of severe liquidation, known as "the rich man's panic," began in October or November, 1902. Under heavy but steady selling the market receded month by month until most of the great gains of 1901 had been lost. The lowest points were 158-175 in October, 1903, and 161-170 in May, 1904. Another forward movement began while the presidential campaign was in progress, and, as in 1900, the election was followed by an outburst of specu- lation. This campaign culminated in March, 1905, with prices of 243-264. A decline was followed by a second great "bull" movement which established a record of 265-294 in January, 1906. Once more the spring brought a reaction, and once more the autumn saw an advance. On July 31 the Steel Corporation announced the resumption of dividends upon its common stock, and on August 17 the Union Pacific raised its dividend from 6 to 10 per cent, and the Southern Pacific began paying dividends on its common stock at the rate of 5 per cent. The market responded with an upward rush to 270-287 in September. There- after for many months a contest seems to have been waged between two powerful cliques. The efforts to carry prices higher were unavailing. Instead, the level of fluctuations gradually declined until March, 1907, when the market broke disastrously on the 14th and 25th. The range for that month was 193-243. Summer brought no great recovery, and in August another relapse resulted in prices lower than those for March. Recuperation in September was followed by the outbreak of panic in October. Next month the market fell to 149-169 — lower than during the troubles of 1903-04, and lower than at any ti m e since 1900; but still above the highest record of 1890-99. After the crisis of 1893, recovery Avas slow, and a fresh decline in 1896 reduced prices to a still lower level. After the crisis of 1907, on the contrary, recovery was rather prompt. By January, 1909, the level was higher than in January, 1907. During the rest of the year the trend was upward, and by December the highest previous record — that for January, 1906 — had been eclipsed. MITCHELL: BUSINESS CYCLES 191 In January, 1910, the tide turned once more, and stock prices entered upon another serious decline. Except for a temporary revival in March, the fall continued until July, by which time all the gains scored since October- November, 1908, had been wiped out. The autumn months brought a partial recovery; but the year ended with prices not far from the lowest quotations of 1909. The downward trend was interrupted in 1911 by upward movements in January-February and again in May- June ; but the gains were less than the subsequent losses, which culminated in September with prices at about the same level as in July, 1910, but higher than in the spring and summer of 1907. The general level of prices during these successive periods has been as follows : Average price January, 1890-April, 1893— Before the crisis of 1893 119 May, 1893-June, 1897— Crisis and depression 81 July, 1897-September, 1900— Eevival of business activity 113 October, 1900-October, 1902 — Flood tide of prosperity 219 November, 1902-July, 1904— The "rich man's panic" 195 August, 1904-February, 1907 — Flood tide of prosperity 251 March, 1907-September, 1908 — Liquidation, crisis and depression 193 October, 1908-December, 1909 — Eevival of business activity 268 January, 1910-December, 1911 — Eeaction 251 4. The Diversity of Fluctuations in the Prices of Common Stocks Stock prices have a much wider range of fluctuations than commodity prices. Table 33, which presents the decils for our 40 common stocks, shows margins between the lowest and highest relative prices which average more than twice as great as the corresponding margins in Table 8, which gives the decils for 145 commodities at wholesale. But though this dispersion of stock prices is wide, it is fairly regular. Greater density toward the middle of the field, narroAving of the margins between the decils under depression and spreading under prosperity, and general agreement between the movements of all the decils, prevail in the case of stocks as in the case of commodities, and show that the very divergencies among the fluctuations are orderly in character. Hence arithmetic means may be accepted as a convenient summary of the whole set of variations. The stocks which have the highest relative prices in the second decade are in general those which had the lowest actual prices in the first decade. Table 34 gives the evidence in the form of the average relative prices of the seventeen stocks which averaged less than $25 per share in 1890-99, the thirteen stocks which averaged $25-99, and the ten stocks which averaged over $100. The 192 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE 33 Decils of the Relative Prices of Common Stocks'i 40 Stocks. By years, 1890-1911. Average actual prices in 1890-99 =^ 100 Tear Lowest 1st decil 2d decil 3d decil 4th decil Median 6th decil 7th decil 8th decil 9th decil Highest 1890 30 60 92 97 105 109 120 134 146 171 266 1891 30 82 93 98 102 106 114 120 132 149 210 1892 70 96 101 105 111 115 119 125 142 167 210 1893 61 66 85 89 93 95 96 99 102 106 147 1894 40 52 65 73 79 87 91 92 96 100 106 1895 30 53 71 81 87 89 92 94 98 103 121 1896 26 53 64 75 77 81 85 88 92 96 102 1897 12 59 66 80 85 88 90 96 98 101 127 1898 17 61 79 85 89 91 98 105 107 121 178 1899 65 84 97 104 107 116 121 138 147 165 303 1900 60 85 91 102 118 124 129 138 150 195 306 1901 102 125 136 144 160 183 203 231 282 328 488 1902 104 139 149 173 204 218 241 285 342 372 564 1903 94 119 131 155 168 182 196 204 248 285 535 1904 92 104 130 157 165 168 187 208 223 284 522 1905 97 129 159 194 208 240 253 265 306 369 689 1906 94 126 170 199 223 236 271 289 327 444 748 1907 63 88 116 139 166 179 192 223 256 311 610 1908 49 92 117 131 156 169 189 219 257 348 586 1909 58 113 132 160 193 241 284 318 372 512 761 1910 32 97 125 135 165 218 233 256 386 488 817 1911 25 89 113 127 155 184 215 259 378 498 878 Averages 1890-99 38.1 66.6 81.3 88.7 93.5 97.7 102.6 109.1 116.0 127.9 177.0 1900-09 81.3 112.0 133.1 155.4 176.1 194.0 214.5 238.0 276.3 344.8 580.9 high-priced shares have been most stable in price ; but even they have advanced much more than commodities at wholesale. A geographical arrangement according to the section of the country served by the railways (Table 35) shows differences even greater than those between low-priced and high-priced stocks. All the groiips participate in the larger movements of the market. That is, all fall heavily between 1892 and 1896 ; all regain much more than the lost ground in 1897-02; all fall in 1903; all rise vigorously again in 1904-06 ; all go down once more in 1907 ; all move upward sharply in 1909, and finally all decline in 1910-11. But the differences in degree 71 This table is compiled, not from the extreme, but from the average prices of the several stocks in each year. MITCHELL: BUSINESS CYCLES 193 TABLE 34 Eelative Prices of Stocks Classified According to Average Actual Prices in 1890-99 Arithmetic means. By years, 1890-1911. Average actual prices in 1890-99 = 100 Year 1890 Less than $26 per share 125 $25 to $99 per share 127 Over $100 per share 106 1891 118 115 101 1892 128 126 107 1893 92 92 99 1894 76 77 95 1895 85 79 95 1896 73 72 91 1897 78 84 93 1898 89 98 100 1899 136 129 114 1900 147 130 116 1901 271 186 140 1902 325 221 161 1903 246 187 141 1904 221 192 142 1905 297 248 173 1906 319 265 183 1907 225 214 155 1908 218 214 157 1909 332 271 193 1910 301 260 166 1911 296 253 160 Averages 1890-99 100 100 100 1900-09 260 213 156 of rise and fall are as striking as the uniformity in direction of movement. The southern, western, and Pacific stocks suffer more severely than the others in 1893-96, and score greater gains in 1897-1902. Between the earlier high record of 1902 and the later of 1909, the coal-carrying and Pacific railway stocks make large gains, the southern moderate gains, and the middle western and northwestern moderate losses, while the Atlantic railway and the express, steamship, and telegraph stocks change but little. On the whole, the last men- tioned groups have been the stablest in price, and the Pacific railway stocks the most variable. But, once more, even the stablest group of stocks has risen more in price than have commodities at wholesale." 72 That these differences in the fluctuations of stocks from different sections of the country are not wholly due to the greater advance in the prices of stocks which were cheap in 1890-99 appears from the following figures: 194 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 35 Relative Prices or Seven Groups of Transportation Stocks. By Years, 1890-1911 Arithmetic means. Average actual prices in 1890-99 = 100 Year 5 North Atlantic railways 4 coal- carrying railways 6 Southern railways 8 Middle Western railways 7 North- western railways 5 Pacific railways 5 express, steamship, and telegraph companies 1890 113 117 132 120 105 144 117 1891 108 106 123 118 94 134 108 1892 119 135 114 128 119 139 108 1893 97 97 84 93 92 99 96 1894 89 95 78 83 76 65 89 1895 89 89 82 93 85 68 91 1896 86 88 67 77 78 64 85 1897 90 89 89 76 88 67 91 1898 95 84 98 93 ■100 87 99 1899 115 99 134 120 164 132 117 1900 110 99 151 123 180 145 108 1901 158 144 259 206 267 259 137 1902 162 181 297 256 332 292 171 1903 133 161 259 188 245 236 151 1904 130 170 250 174 214 240 153 1905 186 255 325 214 281 306 176 1906 177 305 341 227 289 363 178 1907 127 245 269 153 190 320 152 1908 125 270 246 150 192 326 142 1909 159 340 358 201 296 445 177 1910 141 331 349 197 243 406 148 1911 140 328 345 178 244 405 137 Averages 1890-99 100 100 100 100 100 100 100 1900-09 147 217 276 189 249 293 155 5. The Prices of Preferred Stocks Preferred stocks are hybrids — a cross between common stocks and bonds. Their owners have a legal claim to dividends at a certain rate before the common shareholders are allowed any return. Often this prior right is cumu- lative — any deficiency in the preferred dividend for earlier years must be made good from later profits before dividends can be declared on the common stock. Average Gain in actual prices, relative prices, 1890-99 1890-09 Coal-carrying railways $103.98 223 points North Atlantic railways 91.92 46 points Express, steamship, and telegraph companies 82.46 60 points Northwestern railways 41.41 191 points Middle western railways 35.58 81 points Pacific railways 33.28 301 points Southern railways 27.08 226 points A table showing the relative prices of these various groups of stocks by quarters in 1890-1909 may be found in the Journal of Political Economy, May, 1910, pp. 377-379. MITCHELL: BUSINESS CYCLES 195 On the other hand, all of the dividends which remain after the preferred share- holders have received their allotted rate usually go to the common shareholders, so that the latter may receive a larger dividend than the former. Further, the right of voting for directors, and hence the control of the corporation, is frequently vested in the common shareholders alone. These differences between the two kinds of stock give rise to differences in their price fluctuations. It is, therefore, desirable to keep the two kinds separate in an index number of stocks. But it is also desirable to determine the differentiating characteristics of the two sets of fluctuations, and to measure as nearly as may be the varying margin between them. Such an investigation is best based upon the prices of preferred and common shares in the same corporations; for if preferred shares are taken in one set of companies and common shares in another set the results reflect differences in the financial fortunes of the two sets of companies, as well as differences in the business factors affecting the two types of stock. Accordingly, the following tables are made from data concerning the preferred and common stocks of the ten railways for which the most regular series of quotations could be obtained. The titles of these securities are given in Table 36, and their average relative prices in Table 37.'''' The general trend of fluctuation in the relative prices of the two types of stocks has been similar. There are but two instances in which the changes from one year to the next have not been in the same direction for preferred and for common stock. Between 1890 and 1891 the preferred stocks fell slightly, while the common stocks showed no change; between 1905 and 1906 the preferred stocks fell one point, while the common rose thirteen points. In every other case the types rose or fell together. There are, however, notable differences of degree between the two sets of fluctuations. For the flrst eleven years, indeed, the relative prices keep rather close together. The maximum difference occurs in 1900 and is eleven points. But even during these years of close agreement preferred shares exhibit their characteristic greater stability in price. Common stocks start higher, fall lower, and again rise higher than preferred. Further, the "spread" between the annual averages of the lowest and highest monthly prices is always greater for common stocks. These differences in degree of rise and fall became much wider with the great stock market "boom" which began in October, 1900. Since 1901 the average relative prices of the common stocks have exceeded the figures for preferred by margins never less than 59 points and in three years running beyond 100 points. That is, the preferred stocks were much less affected by the "boom" than common stocks. They rose, indeed, and rose at a rate rapid. 73 Correspond ing tables by quarters for 1890-1909 may be found in the Journal of Political Economy, July, 1910, vol. 18, pp. 516-519. Monthly figures are given in Table 44, below. 196 MEMOIRS OP THE UNIVERSITY OP CALIFORNIA in comparison, for example, with the advance in wholesale commodity prices; but common stocks rose more rapidly still. The greater stability of preferred stocks, therefore, stands out more clearly in the last eleven years of the table than in the first eleven years. TABLE 36 List of Preferred and Common Stocks Included in the Following Tables, and Their Average Actual Prices, 1890-99 Average prices, 1890-99 Preferred Common stock stock Value of Preferred com- pared with Common % Chicago, Milwaukee and St. Paul . $130.00 $79.20 164 Chicago and Northwestern . 152.50 114.60 133 Cleveland, Cincinnati, Chicago and St. Louis 89.10 47.90 186 Denvi 3r and P tio Grande 48.80 41.80 14.90 17.50 327 239 Erie Iowa Lake Central Erie an uri, Ka] d Western 32.30 69.50 28.14 9.20 18.30 13.10 351 380 215 Misso isas and Texas Norf( )lk and ,sh Western 38.30 20.10 12.10 8.70 317 231 Waba TABLE 37 jAtivb Prices or Preferred and 1 Common Stocks ; IN Ten Railways. : By Years, 1890-lS Average actual prices ir L 1890-99 - = 100. Arithmetic means Low High Spread Average Year Preferred Commoii Preferred Common Preferred Common Preferred Common 1890 104 106 113 120 9 14 108 113 1891 99 105 109 120 10 15 104 113 1892 111 118 119 129 8 11 115 124 1893 81 82 92 96 11 14 87 89 1894 79 77 85 87 6 10 82 82 1895 83 80 92 94 9 14 87 87 1896 81 76 89 86 8 10 85 81 1897 90 84 98 95 8 11 94 90 1898 103 91 112 102 9 11 107 97 1899 125 118 135 134 10 16 130 126 1900 128 134 138 154 10 20 133 144 1901 169 242 186 283 17 41 178 262 1902 186 290 196 320 10 30 191 305 1903 157 223 169 253 12 30 163 238 1904 152 203 161 226 9 23 156 215 1905 177 266 185 291 8 25 181 278 1906 175 277 185 306 10 29 180 291 1907 133 192 143 220 10 28 138 206 1908 125 182 136 208 11 26 130 195 1909 164 267 174 293 10 26 169 280 1910 143 234 153 262 10 28 148 248 1911 134 224 141 242 7 18 138 233 Averages 1890-99 96 94 104 106 9 13 100 100 1900-09 157 228 167 255 11 28 162 241 MITCHELL: BUSINESS CYCLES 197 CHART 22 \\ 300 280 AVERAGE RELATIVE PRICES OF PREFERRED AND COMMON STOC IN ILN RAILWAYS. •KS II /I (1 t 1 1 1 1 1 1 i 240 1830 -1911. 1 1 1 1 \ \ 2 GO 240 1 1 1 1 1 1 \ 1 \ COMMON STOCKS. I 1 1 \ 1 ( 1 V 1 V , \ 200 i \ 200 i / \ \ 140 1 \ '1 h 160 w ] \\ l\ \ 1 \l \ IZO 100 80 i /( 120 100 80 — 1 \ 1 l\ // /» 11 U 1 1 I / \ 1 1830 '91 '92 '95 '94 '95 '36 '97 '98 '93 1900 '01 '02 '03 '04 '05 '06 '07 '08 '09 1910 '11 198 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA The reasons for this greater stability are found in the differences already pointed out between the rights of preferred and common shareholders. Prom the investor's standpoint, the prior right" to dividends, often coupled with a limitation upon the maximum dividend, promises a more regular return upon piirchases of preferred than upon purchases of common stock. On the other hand, conunon stock is the speculator's favorite, precisely because it promises wider oscillations in price, so that speculative operations doubtless enhance the differences in variableness which investment dealing would establish. Finally, contests for control usually center upon common stock, either because it alone carries voting privileges, or because it is cheaper. Table 38, which gives the dividend record of our ten stocks, shows that the returns upon preferred shares have, in fact, been more regular than the returns upon common shares — except, of course, when no dividends at all have been paid upon the latter.^* It is less easy to explain why common stocks advanced so much more than preferred stocks between 1900 and 1901, and why they have since retained most of the lead thus gained. But Table 38 shows that the roads already paying the fixed rate of dividends on their preferred stocks in 1900 soon there- after became able to begin or to increase the dividends on their common stocks. And Table 39, compiled from the statistical reports of the Interstate Com- merce Commission, indicates that this course was the rule. Until the year ending June 30, 1901, the increase in dividends on preferred stocks had been relatively more rapid; thereafter the dividends on preferred stocks were approximately stable, while dividends on common stocks were more than doubled between 1901 and 1907. The more rapid rise of common stocks was favored also by the improvement in the physical condition of the properties, the higher earnings, the livelier speculative interest, and the establishment of communities of interest and purchases for control. These latter factors, not susceptible of statistical measurement, seem to have been more potent than investment considerations. For, purely on an investment basis. Table 38 would hardly justify Northwestern common, for example, in rising between 1900 and 1902 from $162 to $234, while Northwestern preferred was rising from $201 to $254. 74 The data have been taken from the "Investor's Supplement" appended to the annual issues of the Financial Beview, and checked by Moody's Manual. The few discrepancies between these two sources have been settled by reference to the railway reports published in the Commercial and Financial Chronicle. MITCHELL: BUSINESS CYCLES 199 TABLE 38 Dividends Upon Prepereed and Common Stock Declared by the Ten Railways Listed in Table 36 By Years, 1890-1909 C. M. & St. P. C. &N . w. C. C. 0. & St. L. D. &E i. G. Erie A * A A Tear Preferred Common Preferred Common f Preferred Common Preferred Common Preferred Common 1890 7 7 6 5 4 2.75 1891 7 7 6 5 3 2.50 1892 7 2 7 6 5 3 3 1893 7 4 7 6 5 3 2 1894 7 4 7 5.5 5 1895 7 2 7 4 5 1896 7 4 - 7 5 5 2 1897 7 5 7 5 2.50 2 1898 7 5 7 5 5 2.50 1899 7 5 7 5 5 4 1900 7 5 7 6 5 3 4 1901 7 6 7 6 5 3.50 5 1.50 1902 7 7 8 7 5 4 5 3 1903 7 7 8 7 5 4 5 3.50 1904 7 7 8 7 5 4 5 4 1905 7 7 8 7 5 4 5 4 1906 7 7 8 7 5 4 5 4 1907 7 7 8 7 5 4 5 2 1908 7 7 8 7 5 1 5 1909 7 7 8 7 5 5 Iowa Central L. E. , few. M. K. A &T. N. &W. A Wabash A Year Preferred Common Preferred Common Preferred Common Preferred Common Preferred Common 1890 4 3 0' 1891 4 3 1892 1 4.75 1.50* 1893 5 1894 5 • 1895 5 1896 5 1897 5 1 1898 3.75 3 1899 3 4 1900 1.50 2 4 1901 4 4 2 1902 4 4 2.50 1903 4 4 3 1904 3 4 3 1905 3 4 3.50 1906 3 4 4 4.50 1907 3 4 4 5 1908 1 4 4 4 1909 4 4 4.50 * Plus 1 per cent in scrip. 200 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 39 Dividends Upon Preferred and Common Stocks Paid by Interstate Railways By Tears Ending June 30, 1891-1907 Actual dividends Relative dividends* , ' , , ' , Years Preferred Common ending stoclj: stoclt Preferred Common June 30 Millions Millions stock stock 1891 $16.4 $74.8 82 94 1892 17.9 79.7 90 101 1893 17.3 83.7 87 106 1894 14.0 81.5 70 103 1895 13.9 71.4 70 90 1896 16.2 71.4 81 90 1897 15.8 71.3 79 90 1898 21.5 74.7 108 94 1899 31.1 79.9 156 101 1900 35.2 104.4 177 132 1901 41.7 115.0 209 145 1902 44.0 141.4 ' 221 178 1903 44.5 152.2 223 192 1904 46.2 175.7 232 222 1905 49.1 188.9 246 238 1906 51.6 221.2 259 279 1907 49.7 258.4 249 326 * Average actual dividends, 1891-1900 = 100. Since 1907 the Commission's reports have not segregated the dividends upon preferred and common stocks. The aggregate sums paid have been as follows: Tear ending June 30, 1908 $390.7 millions Year ending June 30, 1909 321.1 millions Year ending June 30, 1910 405.8 millions These figures, unlike those for 1890-1907, do not include the returns of switching and terminal companies. In conclusion, it may not be amiss to show what effect is produced by putting preferred and common shares together in the same index number. Table 40 gives first the index number of forty coimnon stocks from Table 30 ; second the index number of ten preferred stocks from Table 37 ; and third an index number of the two sets in combination. The composite series shows a slightly smaller fall from 1890 to 1896, and a decidedly smaller rise after 1900 than is shown by the series for common stocks alone. Despite the larger number of securities entering into the composite series, it is less significant than the index number for forty common stocks, not only because of the mixing of the two types which the preceding tables show to be different in important respects, but also because of the double weighting of the ten railways for which both kinds of stocks are included. MITCHELL: BUSINESS CYCLES 201 TABLE 40 Relative Pkiobs of Forty Common Stocks and op Ten PRBrEERED Stocks in Transportation Companies. By Years, 1890-1911 Average actual prices in 1890-99 = 100. Arithmetic means Tear 40 common stocks 10 preferred stocks 50 common and preferred stocks 1890 121 108 118 1891 113 104 111 1892 123 115 121 1893 93 87 92 1894 82 82 82 1895 85 87 86 1896 77 85 79 1897 84 94 86 1898 94 107 97 1899 128 130 129 1900 134 133 134 1901 211 178 204 1902 250 191 238 1903 201 163 193 1904 192 156 185 1905 250 181 236 1906 267 180 250 1907 204 138 191 1908 201 130 187 1909 277 169 255 1911 248 138 226 Averages 1890-99 100 100 100 1900-09 219 162 207 6. The Prices of Stocks, Bonds, and Commodities The usual method of constructing index numbers by turning actual prices into percentages and averaging the latter cannot be applied to bonds. For, unlike staple commodities and standard stocks, all bonds which terminate in a given year are constantly changing their net values through mere lapse of time. The thing valued in the bond is the expectation of a specified annual payment for a specified number of years, coupled with repayment of the prin- cipal sum at the date of maturity. As this number of years grows less with each passing season, the thing valued changes. Bond market quotations, there- fore, represent changing prices of goods which themselves are changing. Of course, the relative prices of such changing goods cannot fairly be compared with the relative prices of shares in continuous business enterprises or of substantially uniform commodities. 202 MEMOIES OP THE UNIVERSITY OP CALIFORNIA But an approximately accurate series of relative bond prices can be con- structed by an indirect method. The preceding tables of bond yields show for each year the annual payments for which investors have been willing to lend $100 to certain borrowers under specific agreements as to security, etc. The principal is fixed, the interest variable. But the conditions may be reversed and the principal treated as variable, the interest as fixed. That is, the problem may be stated in the form : How large a loan have investors been willing to make in each successive year in return for annual payments of some given amount, such as the average net yields for 1890-99? The problem is solved by dividing the average net jdelds for the decade by the average net yields for each month or year. For example : In 1890-99 men who bought the bonds of the Chesapeake and Ohio Railway, secured by a first consolidated mortgage, required net annual interest payments averaging $4.70 for each $100 invested. But in 1890 they required $5.09 per annum for each $100 put into these bonds. Had the railway offered them interest at the rate of $4.70 in this year they would have lent it a principal sum represented by the equation 100 ($4.70 -^ $5.09) = $92.34. In this fashion one may compute for each month and year the sums which investors showed themselves ready to lend to each of the railways in return for fixed interest payments. And these sums may be regarded as the relative prices of bonds bearing a uniform rate of interest, and having no fixed period of termination. Further, these relative prices of bonds are fairly comparable with the relative prices of stocks and commodities computed on the basis of average actual prices in 1890-99." Table 41 has been made in this manner to show the relative prices of each of the ten bonds described in Table 18. While no two of the bonds have agreed perfectly in their price fluctuations, the notable feature of the table is the narrowness of the range between the highest and lowest relative prices. It would be difficult to find ten staple commodities which have kept so close together in the last twenty years. The ten common and ten preferred stocks included in the preceding section of this chapter have differed far more in relative prices than have the ten bonds. Among the latter, those which have fluctuated through the widest range are, of course, the bonds which improved most in credit between 1893 and 1902. The poorest bonds have made the best investments and the best bonds the poorest. Not only have the poorer securities yielded higher net returns on their cost prices year by year (Table 19), but they have also been salable on more advantageous terms — bringing decidedly higher profits until 1902, and somewhat smaller losses since then. These higher returns, however, have been obtained by running greater risks. 76 The tables of the relative prices of bonds were computed by Mrs. John Spasoff (Miss Mansfield Everett). MITCHELL: BUSINESS CYCLES 203 A comparison between index numbers for bonds, stocks, and commodities is made in Table 42. The series for United States bonds is made in the manner described from the net yields shown in Table 20. The first series for stocks shows the average relative prices of ten stocks which have paid dividends in each year since 1890." The next three series for stocks are adapted from tables 30 and 37, and that for commodities from Table 9. Table 44 carries out the comparison between the relative prices of bonds and stocks by months." It is preceded by a summary. Table 43, in which the monthly figures are averaged, as in Table 26, according to the successive phases of the business cycles which have run their course in America since 1890. The following are the chief differences shown by these tables between the fluctuations in the prices of bonds, stocks, and commodities: (1) With the exception of the erratic series for United States 4s, bonds are steadier in price than stocks or commodities — showing higher minima in 1890-99 and lower maxima in 1900-09. (2) Bonds rise, while stocks and commodities fall, in the periods of depression following the crises of 1893 and 1907. (3) Bonds reach their highest levels in 1901-02, while common stocks and commodities mount still higher in 1906, 1907, or 1909. (4) While the level upon which bonds fluctuate is somewhat higher in the second decade than in the first, there is no such marked contrast as in the case of stocks. (5) At the end of the period, bond prices show trifling losses or moderate gains in comparison with 1890, while all the series for stocks show large gains. Even the index number for commodities marks a greater advance than the average for bonds. The greater steadiness of bond prices requires little comment. Divi- dends vary, interest is fixed. The ten bonds of these tables have paid the same average return of 4.06 per cent upon. their par value every year since 1890, while the average dividends upon the ten dividend-paying stocks included in Table 42 have varied as follows: Per cent Per cent Per cent Per cent 1890 6.45 1895 5.88 1900 5.95 1905 7.00 1891 6.40 1896 5.90 1901 6.30 1906 7.10 1892 6.53 1897 5.38 1902 6.90 1907 7.70 1893 6.50 1898 5.60 1903 6.90 1908 7.63 1894 6.35 1899 5.60 1904 6.90 1909 7.60 76 The common stocks of the Central Railroad of New Jersey, Chicago and Northwestern, Delaware and Hudson, Illinois Central, New York Central, New York, New Haven and Hartford, and the American Express Company, together with the preferred stocks of the Chicago, Milwaukee and St. Paul, Chicago and North- western, and Cleveland, Cincinnati, Chicago and St. Louis. Unfortunately the number of stocks with clear dividend records is not large enough to permit the computation of significant averages for common and pre- ferred stocks separately. '7 The average relative prices of ten railway bonds in Table 41 are arithmetic means of the corresponding figures for each of the ten bonds. A trial showed that substantially the same results are obtained by divid- ing the average yields of all the bonds in 1890-99 by their average yield for each year. Since the latter method of computation is far less laborious, I have adopted it in working out the monthly figures of Table 44. The discrepancies, produced by this difference in method, between the figures of Table 41 and the annual averages which may be struck from the figures of Table 44 are negligible. 204 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE 41 Relative Prices of Ten American Railway Bonds. By Years, 1890-1911 Arithmetic means. Average actual prices in 1890-99 = 100 1 d d so d-« d O d •8 AVtsiagets 1 ID > ■s IN 3 1890 ■ 95.6 94.4 95.6 92.3 92.8 100.1 97.9 97.0 92.2 98.6 94.1 97.2 95.7 1891 94.9 93.5 94.3 92.0 91.0 92.1 96.6 88.9 91.3 96.6 93.1 93.1 93.1 1892 99.6 97.4 99.2 96.9 95.1 95.8 98.3 94.9 96.6 98.1 97.6 96.7 97.2 1893 97.1 94.9 96.4 94.0 92.6 91.8 96.9 96.4 93.9 95.2 95.0 94.8 94.9 1894 97.4 97.4 98.8 98.9 99.4 96.0 101.3 95.5 99.9 98.9 98.4 98.3 98.4 1895 98.8 103.1 101.1 102.4 101.0 97.7 102.2 97.2 104.3 100.2 101.3 100.3 100.8 1896 97.8 99.7 99.4 99.6 99.0 94.4 102.6 99.5 103.8 99.4 99.1 99.9 99.5 1897 99.8 102.6 100.2 104.9 107.6 100.5 99.7 107.5 106.8 102.9 103.0 103.5 103.3 1898 106.3 107.4 105.1 109.6 111.8 111.4 99.9 111.2 106.2 103.7 108.0 106.5 107.3 1899 115.9 113.0 112.0 114.1 115.9 130.6 105.3 118.6 108.8 107.5 114.2 114.2 114.2 1900 117.3 111.5 113.6 114.1 112.6 132.5 109.5 118.0 108.8 107.2 113.8 115.2 114.5 1901 128.4 119.4 117.0 117.5 120.2 133.3 116.9 118.6 110.3 108.1 120.5 117.4 119.0 1902 130.4 121.2 117.2 117.2 120.8 129.5 122.7 121.3 108.2 107.8 121.3 117.9 119.6 1903 120.7 118.8 112.5 112.2 112.6 122.8 116.0 115.1 103.8 103.4 115.4 112.2 113.8 1904 122.2 120.9 115.0 114.1 114.2 121.8 117.9 115.7 105.4 102.9 117.3 112.7 115.0 1905 126.8 123.6 117.0 116.3 121.5 125.6 120.7 118.6 106.5 103.4 121.0 115.0 118.0 1906 123.4 121.8 112.5 114.6 116.0 119.9 114.5 114.8 105.7 100.7 117.6 111.1 114.4 1907 112.8 115.7 103.7 105.6 107.8 111.1 108.4 107.8 99.2 96.4 109.1 104.6 106.9 1908 115.7 118.2 103.1 108.8 110.1 112.2 110.3 108.4 99.9 96.9 111.2 105.5 108.4 1909 121.0 122.4 112.5 113.8 116.6 115.1 114.5 110.0 102.5 98.4 117.3 108.1 112.7 1910 115.7 120.3 107.9 110.6 111.2 111.1 110.8 105.7 99.9 96.6 1]3.1 104.8 109.0 1911 115.1 119.1 106.0 110.3 111.5 110.3 109.7 105.2 100.2 96.4 112.4 104.4 108.4 Averages 1890-99 100.0 100.0 100.0 100.0 101.0 101.0 100.0 101.0 100.0 100.0 100.0 101.0 100.0 1900-09 122.0 119.0 112.0 113.0 115.0 122.0 115.0 115.0 105.0 103.0 116.0 112.0 114.0 MITCHELL: BUSINESS CYCLES 205 TABLE 42 Relative Prices of Bonds, Stocks, and Commodities. By Years, 1890-1911 Arithmetic means. Average actual prices in 1890-99 ::= 100 Bonds A Stocks Commodities r ' — United States 4s of 1907 Tear and 1925 West Shore B. R. Average of 10 railway bonds 10 dividend paying stocks Preferred stocks in 10 railways Common stocks in 10 railways Common stocks in 40 transportation companies 145 staples 1890 114 99 96 104 108 113 121 114 1891 104 97 93 100 104 113 113 113 1892 99 98 97 105 115 124 123 106 1893 91 95 95 96 87 89 93 105 1894 99 99 98 94 82 82 82 96 1895 96 100 101 95 87 87 85 93 1896 88 99 100 92 85 81 ,77 89 1897 101 103 103 94 94 90 84 89 1898 103 104 107 102 107 97 94 93 1899 112 107 114 118 130 126 128 103 1900 127 107 115 121 133 144 134 111 1901 140 108 119 142 178 262 211 110 1902 140 108 120 157 191 305 250 114 1903 139 103 114 136 163 238 201 114 1904 132 103 115 136 156 215 192 114 1905 138 103 118 158 181 278 250 116 1906 135 101 114 159 180 291 267 122 1907 127 96 107 129 138 206 204 130 1908 113 97 108 126 130 195 201 121 1909 110 98 113 150 169 280 277 124 1910 101* 97 109 142 148 248 254 131 1911 103* 96 108 137 138 233 248 128t Averages 1890-99 100 100 100 100 100 100 100 100 1900-09 130 102 114 141 162 241 219 118 * Computed from average yields of January, April, July, and October, as given by the Report of the Comptroller of the Cur- rency, 1911, p. 823. t Estimated. 206 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA 130 120 no 100 90 Relative Chart 23. Prices of Average of Ten American Railway Bonds AND OF THE West Shore Railway Bonds . 1890-1910. 130 120 110 100 30 . WEST SHORE Railway bonds / \ - y \ \ / \ > y /- / ^ \ \ \ \ — — ^ \ t / ,.' "/ '-^ ^ y > —- --" '^■•™ , 1890 '91 '92 '93 '94 95 '96 '97 '98 '99 1900 '01 '02 '03 '04 "05 '06 '07 '08 09 1910 'll MITCHELL: BUSINESS CYCLES 207 CHART 24. \ RELATIVE PRICES OF BOND?, i\ W 5TQCK5 AND COMMODITIES. \ \ 2G0 1890 -1910. 1 . \ / \ TEN DIVIDEND PAYING STOCKS. ' I COMMON STOCKS IN 40 TRANSPORTTATION COS 1 1 240 ___|45 STAPLE COMMODITIES. 1 1 1 240 1 i 1 1 i i 1 1 220 i 1 i ! i 220 i 1 i i ! i ! i 200 1 1 1 1 200 V \ 1 180 160 i 160 160 1 1 / / / / / / > / / t j \ 140 140 / I 1 — , ( , 1 1 ( 120 100 80 ,/ / / 1 1 1 1 / / t / / 120 100 80 \ / / \ \ \ \ ri- i \ / / / / / 1 / /' :^ ^ \ '^ \ / \ \ / / / / / / '/ • \ / 1890 '91 'SZ "33 '94 '95 '9G '97 '98 '99 1900 'Ol 'OZ '05 '04 '05 'OG '07 '08 '09 1910 208 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA TABLE 43 Bblative Prices op Bonds and Stocks in Seasons of Business Prospeeity, Bonds ]k Av. of 10 railroad W. S. E. R. bonds January, 1890-July, 1890— Prosperity 100 97 August, 1890-Deeember, 1890 — Minor crisis 97 94 January, 1891-July, 1891 — Depression 97 93 August, 1891-August, 1892— Prosperity 98 96 September, 1892-October, 1893— Approach of crisis.. 97 97 May, 1893-October, 1893— Major crisis 94 93 November, 1893-March, 1895 — Severe depression 99 98 April, 1895-September, 1895— Eevival 100 102 October, 1895-June, 1896 — Renewed depression 100 101 July, 1896-October, 1896— Free silver campaign 98 97 November, 1896-June, 1897 — Depression 102 102 July, 1897-Pebruary, 1898— Eevival 104 105 March, 1898-April, 1898 — Spanish war impending .... 101 104 May, 1898-September, 1899— Prosperity 106 111 October, 1899-December, 1899— Minor crisis 107 113 January, 1900-September, 1900 — Slight depression .. 107 114 October, 1900-October, 1902— Prosperity 108 119 November, 1902-July, 1904— "Rich man's panic".... 103 114 August, 1904-August, 1905— Revival 103 118 September, 1905-September, 1906— Prosperity 102 116 October, 1906-September, 1907 — Approach of crisis.. 98 110 October, 1907-December, 1907 — Major crisis 93 101 January, 1908-September, 1908 — Severe depression .. 97 107 October, 1908-Deoember, 1909— Revival 98 112 January, 1910-December, 1911 — Reaction 97 109 Crisis, and Depression, 1890-1911 Stocks 'Av. of 10 preferred stocks Av. of 10 common stocks Av. of 40' common stocks 113 123 131 103 108 115 100 103 107 115 127 123 106 112 116 78 80 84 81 82 81 93 94 91 88 84 82 79 74 71 86 83 77 103 98 93 98 85 87 121 113 113 132 127 133 131 138 130 180 269 219 162 228 195 177 263 232 182 290 265 157 242 231 122 161 166 124 184 190 166 272 269 143 241 251 TABLE 44 Eelative Prices of Bonds and Stocks. By Months, 1890-1911 Bonds Stocks 1890 January W. S. K. R. 99.9 Av. of 10 railroad bonds 97.7 Av. of 10 preferred stocks 113.5 Av. of 10 common stocks 122.5 Av. of 40 common stocks 129.5 February 100.2 97.0 ■ 112.0 115.0 126.0 March 99.9 96.6 107.5 112.5 123.5 April 99.7 97.3 111.5 115.5 127.0 May 99.7 97.3 119.0 136.5 139.0 June 99.9 97.1 111.5 133.0 136.0 July 99.4 96.4 114.0 127.5 132.5 August 98.6 95.4 112.0 121.0 130.0 September 98.6 94.7 111.0 119.5 124.5 October 97.9 94.7 104.0 109.5 116.0 November 95.9 92.3 93.5 97.0 104.0 December 94.7 90.9 92.0 93.5 99.0 MITCHELL : BUSINESS CYCLES 209 TABLE i4r— (Continued) Bonds Stocks W. S. E. E. 1891 January 97.1 Av. of lo' railroad bonds 93.5 Av. of 10 preferred stocks 99.0 Av. of 10 common stocks 103.5 Av. of 40 common stocks 107.5 February 97.6 93.8 101.0 104.0 109.0 March 97.1 . 92.8 96.5 96.0 104.5 April 97.1 93.2 103.0 106.0 110.5 May 96.6 92.6 103.5 108.5 110.5 June 95.9 91.6 98.5 102.5 105.5 July 95.4 91.5 95.5 98.5 102.5 August 95.7 92.2 101.0 109.5 110.0 September 96.9 93.1 114.0 129.5 124.0 October 95.9 93.6 113.0 134.0 125.0 November 96.2 94.0 107.5 123.0 119.0 December 96.9 95.3 115.5 134.5 125.0 1892 January 98.1 96.7 123.0 138.5 128.0 February 98.4 97.3 124.0 134.5 126.5 March 98.1 97.0 123.5 133.0 12.5.5 April 98.1 97.4 119.0 130.5 124.5 May 98.9 98.3 115.5 124.0 122.5 June 99.1 98.4 113.5 118.5 120.5 July 98.4 97.7 113.5 119.5 122.0 August 98.4 97.3 114.5 123.0 125.0 September 97.6 96.7 108.5 113.5 118.5 October 97.4 97.0 110.5 118.5 123.0 November 98.1 96.7 108.5 ■ 117.5 119.5 December 97.6 96.3 105.0 111.0 115.5 1893 January 97.1 97.1 108.0 115.0 119.0 February 97.4 98.1 105.0 111.0 114.5 March 96.4 97.3 99.5 103.5 107.5 April 95.2 97.3 101.0 104.0 109.0 May 95.0 95.7 89.0 92.0 95.0 June 94.5 94.4 82.5 84.0 87.5 July 92.4 91.4 69.5 71.0 76.5 August 90.9 88.9 69.5 71.5 74.5 September 93.1 92.3 77.0 78.0 82.0 October 95.2 93.9 78.0 83.5 85.5 November 97.4 96.5 81.5 85.5 87.0 December 97.6 97.0 81.5 83.0 83.5 1894 January 97.1 96.3 79.0 80.5 82.0 February 98.1 97.2 80.5 82.5 83.5 March 98.6 98.2 85.5 85.5 87.0 April 99.7 99.1 89.0 90.5 89.0 May 98.6 98.9 84.0 84.0 82.0 June 98.6 98.3 78.5 79.5 77.5 July 98.6 97.6 82.0 76.0 75.0 210 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 44— -{Continued) Bonds Stocks A 1894 August 1 W. S. E. R. 98.9 Av. of 10 railroad bonds 98.1 Av. of 10 preferred Btocks 83.5 Av. of 10 common stocks 84.5 Av. of 40 common stocks 81.0 September 99.1 98.8 86.0 88.5 84.0 October 99.7 99.1 79.5 81.0 80.5 November 100.2 99.5 81.5 82.0 80.5 December 99.9 99.0 78.5 77.0 78.0 1895 January 99.9 98.5 76.5 72.5 74.0 February 99.1 97.2 74.5 71.5 73.0 March 99.9 97.4 75.0 73.0 73.5 April 99.7 98.4 83.0 82.0 80.0 May 99.7 100.5 90.0 93.0 87.5 June 100.2 102.2 93.5 93.5 91.0 July 100.4 102.7 95.5 96.0 93.0 August 101.2 103.4 97.5 98.5 95.0 September 101.5 103.7 98.0 100.0 96.5 October 100.7 102.9 96.5 96.0 93.0 Noyember 101.0 102.1 90.0 89.0 86.0 December 99.7 100.4 82.5 76.5 77.5 1896 January 99.9 99.6 81.0 78.5 77.0 February 100.7 101.1 89.0 87.0 83.0 March 100.4 101.1 90.0 82.0 80.5 April 100.4 101.0 91.0 82.5 84.0 May 99^ 101.6 88.5 80.0 79.5 June 100.2 101.3 87.5 82.5 79.5 July 98.4 98.3 79.0 72.5 71.0 August 96.4 95.0 73.0 68.0 65.5 September 97.9 96.5 80.0 76.5 72.5 October 98.1 97.1 82.0 80.5 75.0 November 99.1 100.1 91.0 92.0 84.5 December 100.7 101.1 86.0 85.5 79.5 1897 January 101.2 101.5 87.0 86.0 79.5 February 102.0 102.1 87.5 82.0 76.5 March 101.2 101.9 86.0 84.0 76.5 April 102.6 101.3 80.5 75.5 72.0 May 102.6 101.6 84.5 75.5 72.0 June 103.1 102.6 88.0 82.0 77.0 July 104.6 103.8 92.5 86.5 83.0 August 103.1 104.0 103.5 102.0 93.0 September 102.6 103.8 111.0 109.0 99.5 October 102.6 103.7 104.5 101.0 95.5 November 104.3 104.6 98.0 92.5 90.0 December 104.8 105.8 103.0 97.5 93.5 MITCHELL : BUSINESS CYCLES 211 TABLE 4:4— (Continued) Bonds Stocks 1898 January W. S. B. R. 104.3 Av. of 10^ railroad bonds 107.3 Av. of 10 preferred stocks 106.0 Av. of 10 common stocks 97.5 Av. of 40 common stocks 96.0 February 104.6 107.9 107.5 96.5 94.5 March 103.1 104.9 99.5 87.0 87.5 April 99.7 102.5 96.0 83.0 86.0 May 101.2 105.2 103.0 92.5 92.0 June 102.9 107.0 108.0 97.0 97.5 July 103.7 107.8 107.5 95.5 95.0 August 104.3 108.5 113.0 104.5 98.5 September 104.0 107.8 113.5 102.0 97.5 October 104.3 108.1 106.5 94.0 96.5 November 105.1 109.1 111.5 100.0 97.5 December 106.0 110.2 120.0 111.5 109.0 1899 January 106.6 112.3 127.0 120.5 121.0 February 106.9 112.9 129.0 126.0 125.5 March 107.5 113.0 127.0 123.0 123.5 April 108.1 114.1 129.5 126.0 125.5 May 108.1 115.0 124.5 121.5 124.0 June 109.3 116.0 125.5 120.5 •122.0 July 109.6 115.7 131.0 126.5 129.0 August 109.0 115.5 136.5 133.0 136.0 September 106.9 114.5 136.5 132.0 135.5 October 106.9 113.5 134.0 128.5 133.5 November" 107.2 113.4 136.5 132.5 137.5 December 105.4 lll.S 126.5 121.0 126.5 1900 January 106.9 112.5 128.0 123.5 128.0 February 108.4 114.1 131.5 128.5 131.0 March 107.5 114.3 135^0 141.0 135.5 April 108.1 115.3 139.0 150.5 140.0 May 106.6 114.4 133.5 143.0 132.0 June 107.5 113.7 128.5 139.0 126.5 July 106.9 113.6 128.0 137.5 128.0 August 106.3 113.6 127.5 138.5 127.5 September 106.9 114.0 125.5 137.0 122.0 October 106.9 113.8 129.0 145.5 131.5 November 107.2 115.3 137.0 160.5 143.5 December 108.4 116.9 150.0 188.0 159.5 1901 January 109.0 117.7 159.5 202.5 169.0 February 109.6 119.1 165.5 217.0 177.5 March 110.0 120.2 173.0 243.0 192.5 April 109.0 119.6 182.0 269.0 212.5 May 107.8 119.1 172.0 257.5 204.0 June 107.8 119.2 188.0 286.5 228.5 July 107.2 118.6 181.5 267.0 215.5 August 107.8 118.3 180.0 371.0 218.0 212 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE i4^ (Continued) Bonds 1901 September W. S. E. R. 107.5 At. of 10 railroad bonds 118.0 Av. of 10 preferred stocks 182.0 At. of 10 common stocks 282.5 Av. of 40 common stocks 223.5 October 106.9 118.3 180.5 280.0 222.0 November 106.9 119.1 185.5 293.0 233.0 December 107.5 119.2 183.5 280.0 228.5 1902 January 107.5 119.9 184.5 285.5 232.0 February 107.2 120.2 188.5 293.0 237.5 March 107.5 120.5 188.5 296.0 238.5 April 107.5 121.2 192.5 304.5 248.5 May 108.1 121.2 197.0 299.0 248.5 June 108.4 120.7 200.5 303.5 253.0 July 109.0 120.4 197.5 313.0 258.5 August 108.7 119.4 203.5 331.0 271.5 September 108.4 118.8 199.0 334.0 273.5 October 107.5 118.2 191.5 317.5 259.0 November 106.9 118.1 188.0 298.0 246.5 December 106.0 117.1 184.5 281.0 237.0 1903 January 105.4 117.3 187.5 307.5 251.5 February 105.7 117.2 188.5 303.5 249.5 March 105.1 115.5 186.5 282.0 233.5 April 103.7 114.3 179.0 265.0 220.0 May 103.7 114.9 173.0 260.0 213.0 June 103.7 113.5 168.5 228.5 193.5 July 102.9 112.4 154.5 218.0 184.5 August 102.9, 110.9 152.0 204.0 175.0 September 102.9 111.1 148.5 198.0 171.5 October 101.5 112.7 141.5 191.5 166.5 November 101.5 113.4 146.5 191.5 168.0 December 102.3 113.4 152.0 205.0 179.0 1904 January 102.9 113.9 156.0 205.5 184.0 February 103.4 113.6 147.0 194.0 175.0 March 102.6 113.1 148.5 192.5 171.0 April 102.0 113.8 152.0 196.5 172.5 May 102.3 114.1 147.5 187.0 165.5 June 102.3 114.3 143.5 183.5 167.5 July 102.9 115.7 155.5 195.0 177.5 August 102.9 115.9 156.5 210.5 190.5 September 102.9 116.0 162.0 230.0 203.0 October 103.1 116.6 169.0 250.0 217.5 November 103.1 117.0 176.5 267.5 229.5 December. 103.4 117.2 178.0 266.0 230.5 1905 January 103.7 117.8 181.0 274.5 236.5 February 104.0 118.3 185.0 284.0 247.5 March 103.4 118.2 186.0 290.0 253.5 MITCHELL: BUSINESS CYCLES 213 TABLE i^r— {Continued) Bonds Stocks W. S. E, E. Av. of lo' railroad bonds Av. of 10 preferred stocks Av. of 10 common stocks Av. of 40 comm6n stocks 1905 April 103.4 118.2 181.0 277.0 245.0 May 102.9 118.0 174.0 256.5 230.5 June 103.1 118.0 177.5 258.0 232.5 July 103.7 118.3 182.0 270.0 243.5 August 104.0 118.6 188.5 283.5 256.0 September 103.7 118.1 184.0 286.5 259.0 October 103.7 117.9 187.5 285.5 261.5 November 102.9 117.8 180.5 284.0 261.5 December 102.3 117.0 188.0 290.5 266.5 1906 January 103.1 117.2 187.0 311.5 279.5 February 102.3 • 116.7 186.0 304.5 271.5 March 101.8 115.7 185.5 295.0 264.5 April 101.2 115.1 180.5 288.0 261.0 May 100.7 114.7 176.5 278.0 254.5 June 101.0 114.3 184.0 282.0 259.0 July 100.7 114.1 179.0 274.0 253.0 August 99.9 113.5 173.5 295.0 272.0 September 99.7 113.1 177.0 295.5 278.5 October 99.9 113.4 184.0 291.0 274.5 November 99.7 113.3 184.0 291.5 270.5 December 99.7 112.6 173.5 290.5 270.0 1907 January 99.4 112.5 171.5 270.0 256.5 February 99.4 111.9 164.0 256.5 243.0 March 97.4 109.5 147.5 225.5 218.0 April 97.9 109.1 144.5 220.5 216.5 May 97.9 109.2 142.5 209.5 206.5 June 98.1 107.9 153.0 213.5 205.0 July 97.1 107.9 149.5 224.5 215.0 August 95.9 106.7 147.5 208.0 197.0 September 95.4 105.6 123.0 205.0 197.0 October 94.5 103.3 126.0 169.5 171.5 November 90.9 99.5 117.5 152.5 159.0 December 92.9 101.6 123.5 161.5 167.0 1908 January 95.9 105.8 124.5 166.5 174.5 February 96.4 106.4 102.5 152.0 159.5 March 95.4 105.6 120.5 158.0 170.0 April 95.4 106.8 119.5 171.0 181.0 May 95.7 108.0 119.0 191.5 198.5 June 97.4 107.6 125.5 200.5 199.5 July 97.6 107.7 133.5 208.0 206.0 August 97.6 109.2 135.0 204.5 211.5 September 97.6 109.7 134.0 203.0 212.5 October 97.4 110.3 138.5 211.5 217.0 November 97.4 111.3 149.0 238.0 238.0 December 97.9 112.1 160.5 259.5 252.0 214 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE 44 — (Concluded) Bonds Stocks 1909 January W. S. E. R. 98.9 Av. of 10^ railroad bonds 113.2 Av. of 10 preferred stocks 164.5 Av. of 10 common stocks 269.0 Av. of 10 common stocks 259.0 February 99.4 113.7 156.0 262.5 353.0 March 98.9 113.6 161.5 262.0 257.5 April 98.9 113.5 172.5 279.0 272.0 May 98.6 113.6 168.5 282.0 278.0 June 97.9 112.9 173.0 284.5 283.5 July 98.1 113.0 173.0 285.0 281.0 August 98.1 112.9 181.0 289.5 285.0 September 97.4 112.2 169.5 281.5 282.0 October 98.1 111.9 174.5 301.5 289.5 November 98.6 111.2 178.5 283.5 288.5 December 97.6 111.2 172.0 295.5 295.5 1910 January 97.1 111.1 167.7 284.3 280.0 February 97.1 110.8 156.2 262.8 263.5 March 96.4 110.0 160.8 278.2 278.5 April 96.2 109.2 156.6 266.5 265.5 May 95.9 108.4 154.0 260.0 262.0 June 96.9 107.9 146.0 237.8 249.0 July 96.2 107.4 136.8 217.4 232.5 August 96.6 107.6 138.9 227,4 239.0 September ' 96.9 109.2 150.5 229.7 238.5 October 96.9 109.5 145.5 242.9 256.5 November 96.6 108.9 120.4 238.5 254.5 December 96.6 108.7 140.7 242.6 249.0 1911 January 96.9 109.1 141.2 254.3 254.0 February 96.4 109.0 156.5 243.6 258.5 March 96.4 108.5 153.2 . 255.9 258.0 April 96.2 108.6 158.3 234.7 254.5 May 96.6 108.9 145.8 238.7 256.0 June 96.6 108.9 144.9 248.0 265.0 July 96.6 108.8 142.0 244.5 260.0 August 95.9 108.7 136.6 227.4 247.0 September 95.7 108.2 132.3 215.8 233.0 October 95.9 107.5 134.5 222.4 239.0 November 96.2 108.0 120.7 229.2 245.5 December 96.6 110.1 126.0 233.1 246.0 MITCHELL: BUSINESS CYCLES 215 Moreover, the owners of many Mgh-priced stocks have derived a consider- able irregular gain in addition to dividends from the privileges accorded them from time to time of subscribing for new issues of stock on highly profitable terms." Upon the other stocks included in the table dividends, when paid at all, have been much more variable. Even among the ten preferred stocks only three have yielded dividends every year.™ The general situation is best shown by Table 45, which compares the amounts per mile of line paid by the interstate railways as interest upon funded debt, and as dividends.'" The broad differ- ences between the relatively stable interest payments and the highly variable dividend disbursements go far toward accounting for the differences between the courses pursued by the prices of bonds and stocks. On a purely investment basis, therefore, stocks should fluctuate more violently than bonds. In addition, considerations other than those of an investor intent upon income and safety are a more potent factor in the stock than in the bond market. Speculation, manipulation, contests for control, etc. — all the transactions which produce fluctuations not warranted by changes in the incomes yielded by securities — are primarily phenomena of the stock exchange, and touch the bond market but indirectly. In proportion as stocks become flrmly established as "dividend-payers," however, their prices come increasingly under the control of investment considerations and approximate more closely the steadiness of bond prices. It is partly for this reason that preferred stocks fluctuate less than common stocks, and mainly for this reason that the ten dividend-paying stocks in Table 42 fluctuate less than the ten preferred. The failure of bonds to match stocks in attaining a much higher level of prices in the second decade is a particular aspect of the general difference in stability, which merits especial attention. The salient facts upon which an explanation must proceed are brought out by Table 45. The fiscal years 1893-97 were disastrous to American railways. The table shows the loss of nearly half the net income of 1892, the cutting of dividends, and the slow reduction of interest charges. Common stocks bore the brunt of these bad years and fell heavily in price. Preferred stocks, though less affected than common, fell more than commodities at wholesale. Even the strongest dividend-paying stocks dropped from 105 in 1892 to 92 in 1896.'' But bonds, while falling during the crisis, promptly rose during the years of depression to prices higher than had prevailed in the prosperous months of 78 Compare T. W. Mitchell, "Stockholders' Profits from Privileged Subscriptions," Quarterly Journal of Economics (February, 1905). 79 See Table 38. 80 Compiled from the statistical reports of the Interstate Commerce Commission. Certain changes m the plan of accounting impair somewhat comparisons between the data for income in 1908-09 and m earlier years But the commission's report for 1908 states that the "main figures" of the income account are comparab e (p. 86). I have rearranged the figures for the last two years to make them correspond as nearly as possible with those for 1890-1907. 81 Annual averages of relative prices. See Table 42. 216 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 45 Actual and Relative Net Income, Dividends, and Interest on Funded Debt op the Interstate Eailwats, Per Mile op Line. By Years Ending June 30, 1890-1909 Actual Amounts Relative amounts Av. actual amounts 1890—99 : 100 Years ending Interest on June 30 funded debt Dividends Net income 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 ■1901 1902 1903 1904 1905 1906 1907 1908 1909 Averages 1890-99 1900-09 $1,416 1,361 1,478 1,474 1,439 1,420 1,371 1,352 1,333 1,339 1,313 1,340 1,371 1,383 1,403 1,431 1,451 1,513 1,616 1,639 1,398 1,446 $574 598 628 606 578 484 484 477 521 592 725 802 926 960 1,046 1,097 1,227 1,355 1,718 1,377 554 1,123 $651 682 714 654 317 316 492 444 760 875 1,180 1,235 1,400 1,443 1,313 1,507 1,732 1,976 1,729 1,696 591 1,521 Interest on funded debt Dividends Net income 104 101 97 106 105 103 102 98 97 95 96 94 96 98 99 100 102 104 108 116 117 100 103 108 113 109 105 87 87 86 94 107 131 145 167 173 189 198 221 245 310 248 100 203 110 115 121 111 54 54 83 75 129 148 200 209 237 244 -222 255 293 335 293 287 100 258 1891-92. For investors, frightened by the panic and discouraged by hard times, were in a mood to value more highly than before the relative security of bonds. And this willingness to pay higher prices for relative security more than offset the increased risk which attached to the bonds themselves, owing to the weakened position of railway finances. With the return of prosperity in the summer of 1897 the whole situation changed. The net income of railways was more than trebled between the years ending June 30, 1897 and 1902. Dividends were raised on the stocks which had paid them regularly in the worst of years; dividends were renewed on other stocks, and dividends were gradually begun on many issues which had never paid a dollar. But the railway directors did not distribute all of their increased profits among stockholders. They carried liberal sums over to restore surpluses impaired by the period of hard times, and devoted part of their earnings to bettering the physical condition of their properties which had run down. At the same time they took advantage of the improvement in their MITCHELL: BUSINESS CYCLES 217 CHART 25. i\ Relative Prices cf 40 Common Stocks AND Relative Net Income of the ',\ 320 1 Interstate Railways per mile of line. Years ending June 30,1890-1909. 300 Relative net iwcoME per mile of line. I 280 £60 / 280 260 / / / ( / 1 1 \ 240 4 1 1 240 / \ 1 ; 100 i / 1 100 11 1 1 80 \. / \ ' 80 / \ f eo EO 1 - IB30 31 K 'X M 35 '3G 37 M '33 'm 01 '02 ffi '04 '05 06 m '08 03 218 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA credit and of the favorable rates of interest to sell new issues of bonds, and spent the proceeds largel}^ in increasing their equipment. The result of this policy was to enhance the capacity of the railways for handling traffic and to reduce the cost per unit. Increased profits abundantly rewarded these efforts. Even after reduction to a mileage basis, the net incomes of the railways from 1901-09 were never less than double the average net incomes of 1890-99. Just as common stocks were most affected by the years of depression, so they were most affected by the years of prosperity. The profits of the railways doubled, and so did the prices of common stocks — though the increase of divi- dends was less rapid than the increase of net income. But preferred stocks, most of which confer but a limited right to participate in increased dividends, rose considerably less than common stocks. Yet more moderate was the rise of the few stocks which had paid dividends even in the middle nineties. Most moderate of all was the rise of bonds. The increased financial strength of the railways gave the holders of bonds secured by prior liens a wider margin of safety, and therefore advanced the price of l)onds to a somewhat higher level. But the bondholders made no other gains. On the contrary, the alluring pros- pects of profits in the rising stock market tempted bondholders to convert their bonds into stocks. Further, the keen competition among borrowing corpor- ations gave investors an opportunity to exact better terms, and the increasing cost of living spurred them to make the most of their opportunity. Hence the marked contrast between the relative prices of bonds and of stocks in 1900-09. Another difference between the relative prices of bonds and stocks which requires comment is their course in pei-iods of prosperity, crisis, and depression. Table 43 shows the facts succinctly. Prom the standpoint of profit and loss upon resale, bonds have been the bettei- investments in periods of crisis and depression, and stocks in periods of revival and prosperit5\ Barring the peculiar series for United States 4s, the tables show no exception to the statements that bonds fall less than stocks during crises, and rise less during jDrosperity.*" But the common statement that during periods of depression bonds rise while stocks fall requires quali- fication. Bonds did not rise during the dull months January-July, 1891, and stocks did rise during the dull months January-September, 1908. The truth is that stocks, like all goods for which we have detailed data, react from the extremely low points touched during a severe crisis. But, if the crisis is succeeded by a long period of depression, stock prices sag again, and may, as in 1895, 1896, and 1897, touch lower figures than those of the crisis itself. Bonds, on the contrary, rise during a long period of depression, unless circmn- 82 An apparent anomaly in Table 43 is that the average prices of all classes of securities stand higher in the minor crisis of October to December, 1899, than in the preceding period of prosperity. But the monthly figures of Table 44 show that there was a decline during the period of stress from the level attained toward the close of the prosperous months. MITCHELL: BUSINESS CYCLES 219 stances are such as to cast doubt upon the ability of corporations to pay their interest coupons. Low grade bonds affected by such doubts fall at the same time that high grade bonds are rising. But Table 41 shows that in 3894 and again in 1908 only one bond in the present list fell below its average price during the preceding year of crisis— the bond of the Chicago, Milwaukee and St. Paul in the first case and of the Wabash in the second. Further, a com- parison between tables 41 and 19 shows that the bonds in highest credit rose less in price during these years of depression than several of the other secur- ities. Investors who had been frightened out of the stock market did not insist upon having the very best of bonds ; but sought rather for issues which appeared safe, and at the same time yielded i^-i/o per cent more upon the investment than did the bonds guaranteed by the New York Central. In brief, bonds are more stable in price than commodities, commodities more stable than dividend-paying stocks, the latter more stable than preferred stocks, Avhile common stocks are most variable of all. Further, bond prices differ strikingly from stock and commodity prices in rising during periods of business depression, and sometimes falling in periods of business prosperity. 7. International Comparisons Unfortunately, no statistics of the prices of securities in other countries have been published which are comparable in form with the preceding tables. The usual practice in treating the course of the stock market is to quote the prices of securities selected at random for certain dates, or to give the total prices of a long list of bonds and stocks lumped together. Such material may serve other purposes passably; but it is obviously of little value for deter- mining the relations between the price fluctuations of securities and commod- ities. True index numbers of stocks and bonds are needed, but they have not been provided.^^ Our international comparisons must therefore be confined to the relative prices of the few foreign bonds for which interest yields have already been presented.'* The relative prices of these securities and of their best American counterparts are shown in Table 46. In respect to the price fluctuations which the bonds have undergone from year to year, the three European series are rather like each other and decidedly different from the American series. The year 1891 was one of "undigested securities" in Europe, not unlike 1903-04 in the United States. A vast mass 83 The best known of the foreign series is that published by the Bankers ' Magazine of London, giving the total market value of over 300 securities at the quotations of the end of each month (with occasional omis- sionsl These figures are conveniently summarized for the years 1887-1907 by P. L. Newman, "A Review of the Investments of Offices in Eecent Years, with notes on Stock Exchange Fluctuations and the Future Rate of Interest," Journal of the Institute of Actuaries, vol. 42, pp. 294-320. The list of securities included has been changed several times during this period. A somewhat similar tabulation for France is published nearly every year by RafEalovich in Le marche financier, see, for example, 1909-10, p. 251. 84 See Chapter IV, iii, 4, above. 220 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA 150 120 110 100 90 Chart aS. Relative Prices of Bonds of the West Shore Railwav and OF THE American , British , French, and German Governments. 1890-1909. 150 140 130 120 110 100 90 NiTEO states 4s of 1907 AND I9E5. (/esT Shore Railway. V English CBnmls zyi and 2fe per cent. French Rentes 3 per cent. o o German Imperial 3 per cent. / \ / \ \ / / \ \ \ / \ X \ \ { --■..• % X*"^ .-*•'* '/ "V,, •.., c >< 1 \ ; ^ ^ .-' ■x> V ^ ) r \ 1 1890 '91 '92 '93 '94 '95 '96 '91 '98 99 1900 'oi 'OZ '03 '04 'oS 'o6 "01 '08 "09 1910 TABLE 46 Eelativb Prices or Bonds of the West Shore Railroad and op the American, British, French, and German Governments. Bt Years, 1890-1909 United States A Great Britain, Consols 2% and 2^4 per cent 93 France, Rentes 3 per cent 92 Germany, Imperial 3 per cent 95 'u. S. 4sof Year 1907 and 1925 1890 114 West Shore' R. R. 99 1891 104 97 93 95 93 1892 99 98 94 98 94 1893 91 95 95 98 94 1894 99 99 98 101 99 1895 96 100 103 103 108 1896 88 99 107 103 109 1897 101 103 109 105 107 1898 103 1^4 107 104 104 1899 112 107 104 102 99 1900 127 107 97 102 95 1901 140 108 91 102 98 1902 140 108 92 102 101 1903 139 103 95 99 100 1904 132 103 94 98 99 1905 138 103 96 100 99 1906 135 101 94 99 96 1907 127 96 90 96 92 1908 113 97 92 97 91 1909 110 98 90 98 93 Averages 1890-99 100 100 100 100 100 1900-09 130 102 93 99 96 MITCHELL: BUSINESS CYCLES 221 of stocks and bonds, which European investors had bought during the hopeful years 1888-90 from promoters and underwriters at home and abroad, weighed heavily upon the market after the disaster of Barings in November, 1890. To protect these doubtful holdings many overloaded firms and individuals were forced to sell their gilt-edged securities, not only in London and Berlin, but also in New York. Hence the decline in the price of bonds shown by Table 46 in 1891. Rentes escaped the decline, because French investors, sobered by the collapse of the copper ring, the Gomptoir d'Escompte, and the Panama Canal Company early in 1889, had taken less share in speculative ventures. During the dull years which followed European investors became as timid as they had been bold, and sought secuiity alcove all things. The result was a fairly steady rise of high grade bonds in England, France, and Germany until 1896 or 1897. In America the course of affairs was very different, because of the panic of 1893 and the agitation for free coinage of silver — disturbing factors of which Europe felt but a moderate reflex influence. After the depression business activity began to revive somewhat earlier on the other side of the Atlantic — in 1896 or even in 1895, instead of in the summer of 1897. Confidence returned with prosperity and investors began to show preference for securities which promised higher returns than government bonds. Hence tlie latter declined in price and their net yields rose gradually until 1900-01. But American investors, Avith the panic of 1893 and the setback of 1896 still fresh in mind, kejjt on buying high grade bonds freely until 1901-02. The crisis of 1900 was more serious in Europe than here. It again dis- posed investors to seek safety, and bond prices turned upward — vigorously in Germany, where the crisis was most severe, mildly in France and England. The highest points reached, however, were much below the records of 1896-97. The movements of 1903-05 were irregular and slight — save that United States 4s declined heavily in 1904. But after 1905 the renewed prosperity brought renewed neglect of bonds, and prices fell rapidly until 1907. This time the American trend harmonized with the European. The difficulties experienced in financing large enterprises in New York had their counterparts in London, Paris, and Berlin. After the crisis, bond prices rose again; but the yearly averages for United States and German Iwnds were less in 1908 than in 1907. In the last year the French, German, and West Shore bonds rose slightly, while consols and United States 4s fell. The chief differences between the trend of the bond market in this country and abroad, then, are the interruption of the rise of prices in America by the panic of 1893 and by the free-silver campaign of 1896, and the rise of American bonds in 1897-1901, while the European bonds were falling. This rise of American bonds under conditions of marked prosperity, such as usually dispose investors to seek investments of a more lucrative character, is the most 222 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA surprising result of the wliole investigation. So far as United States 4s are concerned, the settlement of all doubts about the medium in which the obliga- tions would be paid, and the increasing demand for bonds as a basis of national- bank circulation, provide an adequate explanation. The Gold Standard Act may also have improved the rating of the West Shore bonds, which are not expressly payable in gold; but it will be recalled that these bonds were not greatly affected by the free-silver agitation, save in the summer of 1896. More influence was exercised by the notable increase in the financial strength of American railways, to which attention has been called. Directly, the West Shore bonds were less affected by this factor than the issues of roads which had been in straits during the years of depression. But an increase in the prices of so large a group of securities as the bonds of other railways must have reacted upon the price of any single issue ; for the prices of all high grade bonds are intimately related to each other through the tie of substitution goods. CHAPTER V THE VOLUME OE BUSINESS I. The Physical and the Pecuniary Volume of Business Erom the viewpoint of economic welfare, changes in the volume of goods provided for a people's use are the most important features of business cycles. Depression is misfortune because it increases the number of families which cannot get sufficient food, clothing, and shelter, and because it prevents many families above the poverty line from getting certain of the good things in life to which they have been accustomed. The fluctuations of prices are relatively artificial matters, which acquire significance only because they react upon the process of providing goods for gratifying wants. But Chapter II shows that in attempting to account for business cycles we cannot keep steadily to the consideration of economic welfare. Eor where money economy prevails there economic activity is animated and guided by the prospects of winning pecuniary profits. To understand the rhythmical alternations of expansion and contraction to which this activity is subject, we must therefore look at affairs from the business viewpoint. And from this viewpoint, changes in the volume of goods made available for use are by no means the most important phenomena of prosperity, crisis, and depression. On the contrary, they count merely as one of the factors affecting present and prospective profits, and stand on the same level as the fluctuations in prices which were treated in the preceding chapter. In analyzing the factors on which prosperity depends, prices and volume of business can be segregated only by making volume of business mean tons of pig-iron, bales of cotton, ])ushels of wheat, gallons of petroleum, and the like. To the man on the street, however, volume of business means pecuniary quite as often as physical volume. A department store reckons the increase in the size of its trade not by the yards of cloth, pairs of shoes, and number of frying- pans it sells in successive years, but by its aggregate sales in dollars and cents. Thus, like most of the terms which economics borrows from work-a-day life, volimie of business is ambiguous. In theoretical discussions, the aim is usually to select some one among the several current meanings of such a term, erect it into an "economic concept," [223] 224 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA and use the word only in this technical sense. But in the present case we face a special difficulty. Among the chief indices of the volume of business are several which have no other than a pecuniary meaning — for example, bank clearings, gross receipts of railways, and domestic bills of exchange. We can- not dispense with these measures, because those expressed in physical terms are too scanty. And if we could dispense with them, we should miss the interesting facts which may be learned by comparing changes in the physical with changes in the pecuniary volume of trade. Accordingly, the phrase must be allowed to keep both of its current mean- ings, and both sets of facts which it covers must be investigated. Misunder- standings may be prevented by using one of the two explanatory adjectives wherever the context does not show whether pecuniary or physical quantities are meant. II. The Movement of the Population Changes in the physical volume of business from one phase to the next within a business cj^cle are but slightl.y affected by changes in the number of hands capable of work or in the number of mouths needing to be filled. The best official estimates of the numbers of Americans, English, French, and Germans indicate that the rate of increase is not much faster in periods of prosperity than in periods of depression. Table 47 shows that in 1890-1909 the United States grew faster in population than did Germany, and Germany faster than England, while France grew but little. These differences help to account for the fact, brought out by subsequent tables, that during these twenty years the physical volmne of business increased faster in America than in Germany, faster in Germany than England, and faster in England than in France. But it is only in periods which can be reckoned by decades that the population factor assumes great prominence. Even when we turn to birth-rates and death-rates, we find it difficult to establish a close correlation between them and the condition of business. There are no comprehensive American data on the subject, but the excellent foreign figures point to a similarity of conditions among nations of western culture. Germany has both a higher birth-rate and a higher death-rate than her neigh- bors; but in all three countries both the birth- and death-rates have declined during the twenty years. This decline is the notable feature of Table 48. Refined methods of analysis covering a longer period might establish a connec- tion between the varying pace of the decline and business cycles ; but certainly the present figures have no such connection plainly stamped upon their face, as have the figures for prices with which we have been dealing.^ The marriage 1 Tugan-Baranowsky, Eandelskrisen in England, pp. 292-3, shows tliat the influence of crises upon the vital statistics of England was greater in the second than in the fourth quarter of the nineteenth century. He ascribes the change to an improvement in the economic condition of the wage-earners. MITCHELL: BUSINESS CYCLES 225 rate, on the contrary, does vary with the condition of business. It declines in the middle nineties when times were bad, rises with the return of prosperity in the later nineties, dips again in the dull years 1902-04, and rises once more between 1904 and 1906 or 1907. Further, there is slight change in the decennial averages from 1890-99 to 1900-09." But since these variations in the marriage rate are not followed by corresponding variations in the birth-rate, they possess little significance for the growth of population. The one factor of change in population which is clearly and closely con- nected with changes in business conditions is immigration and emigration. Immigration into the United States has shown a marked increase from one decade to the next; but this growth is exceedingly unsteady. In prosperous TABLE 47 Population of the United States, England, France, and Germany By Years, 1890-1910 In Actual figures millions and tenths of millions A Average Relative figures actual population 1890-99 = 100 Tear United States England and Wales France Germany United States England and Wales France Germany 1890 62.9 28.8 38.4 49.2 92 95 99 95 1891 63.8 29.1 38.4 49.8 93 96 99 96 1892 65.1 29.4 38.4 50.3 95 97 100 97 1893 66.3 29.8 38.4 50.8 97 98 100 98 1894 67.6 30.1 38.4 51.3 99 99 100 99 1895 68.9 30.5 38.5 52.0 101 101 100 100 1896 70.3 30.8 38.5 52.8 103 102 100 102 1897 71.6 31.2 38.6 53.6 105 103 100 103 1898 72.9 31.5 38.8 54.4 107 104 100 105 1899 74.3 31.9 38.9 55.2 109 105 101 106 1900 76.3 32.2 38.9 56.0 112 106 101 108 1901 77.6 32.6 39.0 56.9 114 108 101 110 1902 79.2 33.0 39.1 57.8 116 109 101 111 1903 80.8 33.3 39.1 58.6 118 110 101 113 1904 82.5 33.6 39.2 59.5 121 111 102 115 1905 84.1 34.0 39.2 60.3 123 112 102 116 1906 85.7 34.3 39.3 61.2 125 113 102 118 1907 87.3 34.7 39.3* 62.0 128 114 102 119 1908 88.9 35.1 39.4* 62.9 130 116 102 121 1909 90.6 35.4 39.4* 63.7 133 117 102 123 1910 92.2 35.8 39.5* 64.6 135 118 103 124 1911 93.8 36.2 39.5* 65.4 137 119 103 126 Averages 1890-99 68.34 30.31 38.53 51.94 100 100 100 100 1900-09 83.30 33.82 39.19 59.89 122 112 102 115 * Provisional figures. Compiled from the statistical abstracts of the several countries. 2 The marria ge rate tends to rise, where the decline in both birth- and death-rates is raising the average age of the population. 226 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA 150 120 110 100 90 Relative Population OF THE Chart 27. United States , 1890 - 1910 England , France: ,AND Germany. 140 130 120 110 100 90 ^ 1 .. .,, ( JNITED STATtS. :ngland. ■ "RANCE . jERMANY ^ ^ - > ^ / ^ »* — / ^ -- ^ y ^^* ^'' ^, ,-' ,.-^ -- *» ^ ..*•' [T^ ^^ _.. ^^0' r^^ ?^ 1890 '91 '92 '92) '94 '95 '96 '97 '98 '99 1900 'Ol '02 '03 '04 "05 '06 '07 "08 '09 1910 years the increase is very rapid ; in bad years there comes not a slackening of the increase, but a heavy decrease. A year or two is required, however, for a change in business conditions to develop its full influence upon immigration. Emigration from the United Kingdom follows in general the same course as immigration into the United States. It seems to depend less on business conditions at home than on business conditions abroad. Hard times and unemployment in Britain do not drive people abroad so much as good times and full employment elsewhere attract them, or enable their friends who have gone before to send back passage money. In Germany, on the contrary, condi- tions at home appear to be the factor of greatest weight. The dull times after 1890 led to an increase in emigration; and the return of prosperity led to a decrease. The dull times following the crisis of 1901-02 were followed by another increase, and the return of prosperity by a further decrease. But the most striking fact about the German figures is the decline in the level of fluctuations since the early nineties. The rapid development of the country's industries which began in 1895 has provided work at home for every one who sought it in the years of prosperit)^ and the years of depression have been neither very severe nor numerous. Finally, the French figures for emigration possess little significance beyond showing that the French prefer to stay at MITCHELL: BUSINESS CYCLES 227 TABLE 48 BiKTH Rates, Death Rates, and Marriage Rates of England, Prance, and Germany By Teaks, 1890-1909 Number of births per hundred of the population Number of deaths per hundred of the population Number of persons married per hundred of the population Year 1890 England and Wales 3.02 France 2.18 Germany 3.57 England and Wales 1.95 France 2.28 Germany 2.44 England and Wales 1.55 Prance 1.40 Germany 1.60 1891 3.14 2.26 3.70 2.02 2.29 2.34 1.56 1.49 1.60 1892 3.04 2.23 3.57 1.90 2.28 2.41 1.54 1.51 1.58 1893 3.07 2.28 3.67 1.92 2.25 2.46 1.47 1.49 1..58 1894 2.96 2.23 3.59 1.66 2.12 2.23 1.50 1.49 1.58 1895 3.03 2.17 3.61 1.87 2.22 2.21 1.50 1.47 1.60 "1896 2.96 2.25 3.63 1.71 2.00 2.08 1.57 1.51 1.64 1897 2.96 2.23 3.60 1.74 1.95 2.13 1.60 1.51 1.68 1898 2.93 2.18 3.61 1.75 2.09 2.05 1.62 1.48 1.68 1899 2.91 2.19 3.58 1.82 2.11 2.15 1.65 1.53 1.70 1900 2.87 2.14 3.56 1.82 2.19 2.21 1.60 1.55 1.70 1901 2.85 2.20 3.57 1.69 2.01 2.06 1.59 1.56 1.64 1902 2.85 2.16 3.50 1.63 1.95 1.94 1.59 1.51 1.58 1903 2.85 2.11 3.38 1.55 1.93 2.00 1.57 1.51 1.58 1904 2.80 2.09 3.41 1.63 1.94 1.96 1.53 1.52 1.60 1905 2.73 2.06 3.29 1.53 1.96 1.98 1.53 1.54 1.62 1906 2.72 2.05 3.31 1.55 1.99 1.82 1.57 1.56 1.64 1907 2.65 1.97* 3.23 1.51 2.02* 1.80 1.59 1.60* 1.62 1908 2.67 2.02* 3.21 1.48 1.89* 1.81 1.51 1.60* 1.60 1909 2.58 1.95* 3.11 1.46 1.92* 1.72 1.47 1.56* 1.56 1910 2.51 1.96* 2.98 1.35 1.78* 1.62 1.50 1.56* 1.54 Averages 1890-99 3.00 2.22 3.61 1.83 2.16 2.25 1.56 1.49 1.62 1900-09 2.76 2.08 3.36 1.59 1.98 1.93 1.56 1.55 1.61 * Provisional figures. t Twice the rate for number of marriages per hundred. Compiled from the statistical abstracts of the several countries, born. The German rates have been recomputed to exclude the still- home whether times are good or bad. They are as conservative in choosing their homes as in choosing their investments. But though emigration and immigration are clearly connected with business conditions, except in France, they are not sufficiently important factors in the total population of any great nation to accelerate or retard the growth of numbers in a notable degree. If the official estimates of population given in Table 47 may be trusted, even the United States increases in numbers at a fairly steady rate whether times be good or bad. To provide steady employment for the ever growing army of workers, then, it is not sufficient to maintain unimpaired the supply of raw materials and of industrial equipment." And to provide steady sustenance for the growing army 3 This is the fact upon which Pohle has laid such stress. See note, on p. 19, above. 228 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 49 Immigration Into the United States and Emigration From the United Kingdom, France, and Germany By Years, 1890-19] Actual numbers Thousands of immiCTants or ( 3migrants Average Relative numbers actual numbers in 1890-99 = 100 A . Year United States United KinKdom (2) France (3) Germany (41 United States United Kingdom France Germany 1890 455 218 21 97 123 122 313 161 1891 560 219 6 120 152 122 90 199 1892 580 210 6 116 157 117 90 192 1893 440 209 6 88 119 117 90 146 1894 286 156 4 41 77 87 60 68 1895 259 185 5 37 70 103 75 61 1896 343 162 5 34 93 90 75 56 1897 231 146 5 25 63 81 75 41 1898 229 141 4 22 62 79 60 36 1899 312 146 5 24 84 81 75 40 1900 449 169 5 22 122 94 75 36 1901 488 172 4 22 132 96 60 36 1902 649 206 4 32 176 115 60 53 1903 857 260 6 36 232 145 90 60 1904 813 271 5 28 220 151 75 46 1905 1,026 262 5 28 278 146 75 46 1906 1,101 325 6 31 298 181 90 51 1907 1,285 396 8 32 348 221 119 53 1908 783 263 5 20 212 147 75 33 1909 752 289 5 25 204 161 75 41 1910 1,042 398 26 282 222 43 1911 879 455 23 238 254 38 Averages 1890-99 369.5 179.2 6.7 60.4 100 100 100 100 1900-09 820.3 261.3 5.3 27.6 222 146 79 46 ^ By years ending June 30. Revised figures from the Immigration Commission's Abstract of the Statistical Review of Immi- gration to the United States, p. 8. The data show thousands of "immigrants arriving" in 1890-1903, of "aliens admitted" in 1904-05, and of "immigrant aliens admitted" in 1906-10. ^ Thousands of British and Irish passengers leaving the United Kingdom for countries outside of Europe. From the Statis- tical Abstract of the United Kingdom. 3 Thousands of emigrants to countries outside of Europe. Prom the Annuaire Statistique de France. * Thousands of Germans leaving for countries oversea by both German and foreign ports. From the Statistische Jahrbiicher fiir das Deutsche Reich. of consumers it is not sufficient to maintain a constant supply of food, clothing, and shelter. In both cases the provision must be made on a larger scale in each successive year. A period of unchanging physical volume of business, there- fore, means actual deterioration in the economic wellbeing of the community — deterioration which is more serious in the United States, where population increases fast, than in Prance, where population increases slowly. Similarly, a decline in this volume means a more serious setback than the face of the figures suggests, and a rise means a less considerable gain. MITCHELL: BUSINESS CYCLES 229 3E0 Chart 28. Relatwe Number of immigrants into the Un(ted States AND OF Emigrants from txe United Mngdom, France and Cermant. 1690 - 1910. 1 340 1 300 280 300 280 ... E E mm J1I0W (T5 Tf NTSfT on on Ger Fw INCE r^ P |— — 260 £40 \ — — — 1 ~ j 260 240 zao 200 — — - - 1 \ _ ~1- \ 220 200 1 V ( i ' 160 140 120 100 80 1 i . 1 1 / / I 1 1 1 1 1 1 , 160 140 120 100 80 n / 1 1 \i 1 1. ■ / ( / / / / / t ^>— \ / 1 1 / t ] \ s . 1 -■' r • * : \}\ /•■^ j „ ; >•- .... 60 40 f- 1 \ 1 60 40 \ '\ / / \ L.., 4 / \ / •^. f \.' 1830 '31 '32 '93 '34 '35 '% '37 '38 -33 1300 '01 '02 03 04 05 06 OT 08 03 1910 | 230 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA III. The Volume or Gtoods Produced Coal is typical of Sombart's ''inorganic goods," tlie supply of which ordi- narily follows the fluctuations of market demand/ Strikes, railway blocliades, or the like, may interfere for a time with filling orders, and in dull times the operators may prefer to accumulate stocks rather than to reduce their output ; but, in general, the rate of production is adjusted to the volume of orders. The latter, however, is far steadier in the case of coal than in that of most commodities. A large proportion of the demand is for domestic uses, and times must be hard indeed to cause a considerable decline in the amount of fuel used for heating and cooking. The business demand is more variable, but never- theless steadier than the business demand for almost any other staple. For coal is largely consumed by every great industry in the country, so that it is not dependent for its market upon the j^rosperity of any one. For these reasons the production of coal pursues a remarkably even course. Table 50 shows that the output in all four of our countries has increased rapidly since 1890 — much more rapidly than population. The development has been fastest in the United States, then in order come Germany, Great Britain, and France. So strong is this factor of growth that a mild depression of business serves only to lessen the rate at which production increases, and even a severe depression causes a relatively slight and brief falling off. Thus the lowest points touched during depression in one business cycle are higher than the highest points reached during prosperity in the preceding cycle. Pig-iron resembles coal in that its production can ordinarily be adjusted promptly to changes of demand ; but it differs from coal in that the demand is wholly for business uses. Moreover, the business demand itself is more fluctu- ating for pig-iron than for coal, because it is distributed less evenly among different lines of business and is less continuous in any one line. Coal is burned every day a factory runs, but pig-iron and its products are bought in much greater amounts when factories and railways are striving to increase their equipment than in duller seasons. Consequently the production of pig-iron undergoes wider oscillations than the production of coal. The factor of growth is as prominent in Table 51 as in Table 50, and the average rate of gain is not notably different.^ Again, the United States has gained most, and Germany next. France, however, shows a more rapid increase than Great Britain ; but that is mainly because the smaller scale of production in France in 1890-99 makes comparatively moderate actual increases in 1900-09 appear as large percentages of the basic figures." This growth, however, has been broken by more numerous and more serious setbacks 4 See Chapter I, ii, 11. s The increase in the output of pig-iron has been rather more rapid than the gain in the coal output in the United States, Germany, and France. The opposite is true of Great Britain. e In coal production also the French scale of production was much smaller than the British in 1890-99. Nevertheless the British increase was greater not only absolutely but also relatively. MITCHELL: BUSINESS CYCLES 231 200 190 lao 170 160 ISO 140 130 120 110 100 90 80 chart 29. 250 Relative Production of Coal in the UNITED States . United Kingdom , France , and Germany. 1890 - 1909. \ \ 1 230 220 210 200 190 ISO no 160 150 140 150 120 110 100 90 80 \ 1 I NiTED States. NiTEo Kingdom. QAKirr 1 ' u F Germany. / 1 * .-**'' / / / \ / / / i '' / / f ,•' / I / / w / / / r ^4 / i .* / / V / 1 "j / — / ^"' ••5:: '/ / / J- ¥ /- / / \ ^■'' "7 K i. 7 • / > 1 1890 '91 '92 "93 '94 95 '96 '91 '98 99 1900 '01 '02 '03 '04 '05 'OG '01 '08 '09 1910 232 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA TABLE 50 Production op Coal in the United States, United Kingdom, France, and Germany By Years, 1890-1909 Actual amounts Millions of long tons Average Relative amounts actual amounts 1890-99 > = 100 Year 1890 United States 141 United Kingdom 182 Prance 26 Germany 88 United States 82 United Kingdom 95 France 93 Germany 83 1891 151 185 26 93 88 97 93 88 1892 160 182 26 91 93 95 93 86 1893 163 164 25 94 95 86 89 89 1894 152 188 27 97 89 98 96 .92 1895 172 190 28 102 100 99 100 ■ 97 1896 171 195 29 111 100 102 103 105 1897 179 202 30 119 105 106 107 113 1898 196 202 32 126 114 106 114 119 1899 227 220 32 134 133 115 114 127 1900 241 225 33 147 141 118 117 139 1901 262 219 32 151 153 115 114 143 1902 269 227 30 148 157 119 107 140 1903 319 230 34 160 186 120 121 152 1904 314 232 34 167 183 121 121 158 1905 351 236 35 171 205 124 125 162 1906 370 251 34 190 216 131 121 180 1907 429 268 36 203 251 140 128 192 1908 371 262 37 212 217 137 132 201 1909 411 264 37 214 240 138 132 203 1910 448 264 38* 219 262 138 135* 208 Averages 1890-99 171.2 191.0 28.1 105.5 100 100 100 100 1900-09 333.7 241.4 34.2 176.3 195 126 122 167 * Provisional figures. Compiled from the statistical abstracts of the several countries. The German figures include both "Braunkohlen" and "Stein- kohlen." The metric tons of France and Germany are reduced to long tons by dividing by 1.0156. than in the case of coal, and, on the other hand, the gain in periods of prosperity has been correspondingly more rapid. Indeed, the statistics of pig-iron output form one of the most sensitive barometers of business conditions. But, marked as is the effect of depression and prosperity upon the physical volume of pig-iron produced, the effect upon the pecuniary value of the output is greater still. Depression brings not only a reduction of output, but also a reduction of price, which accentuates the change in volume when the data are converted from tons into dollars. The price often continues to decline for a time after the lowest ebb of production has been passed, so that, as Table 52 MITCHELL: BUSINESS CYCLES 233 Production TABLE 51 OP Pig-Ikon in the United States, United Kingdom, Psance, and Germany By Years, 1890-1910 Actual amounts Hundreds of thousands of long tons Relative amounts Average actual amounts 1890-99 = 100 Year United States United Kingdom France Germany United States , — ^. Kingdom United Prance Germar 1890 92 79 19. 46 98 99 / 88 . 79 1891 83 74 19 46 89 93 88 79 1892 92 67 20 49 98 84 93 84 1893 71 70 20 49 76 88 93 84 1894 67 74 20 53 72 93 93 91 1895 94 77 20 54 100 97 93 93 1896 86 87 23 63 92 109 107 109 1897 97 88 24 68 104 111 112 117 1898 118 86 25 72 126 108 116 124 1899 136 94 25 80 145 118 116 138 1900 138 90 27 84 147 113 126 145 1901 159 79 24 78 170 99 112 134 1902 178 87 24 84 190 109 112 145 1903 180 89 28 99 192 112 130 171 1904 165 87 29 99 176 109 135 171 1905 230 96 30 107 246 121 140 185 1906 253 101 33 121 270 127 153 209 1907 258 101 35 127 276 127 163 219 1908 159 91 34 116 170 114 158 200 1909 258 95 35* 124 276 119 163* 214 1910 273 100 40* 146 292 126 186* 252 Averages 1890-99 93.6 79.6 21.5 58.0 100 100 100 100 1900-09 197.8 91.6 29.9 103.9 211 115 139 179 V * Provisional figures, subject to revision. Compiled from the statistical abstracts of the several countries. The metric tons of Prance and Germanv are reduced to lone tons by dividing by 1.0156. shows, the season of lowest vahie is frequently one or more years later than the season of smallest output. Even after the price has turned upward, its advance is slow for a while, so that new high records of value are much later in being made than new high records of production. For example, the output record of 1890 was surpassed in 1895 in America, in 1896 in England, and as early as 1892 in both France and Germany ; but the value records of 1890 were not surpassed until 1899 in America and England, 1897 in France, and 1896 in Germany. Finally, at the culmination of prosperity the advance of prices becomes very rapid, so that the extreme fluctuations of value are much greater than the extreme fluctuations of output. In other words, the pig-iron industry is steadier than the pig-iron business. 234 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Chart 30. Relative Production of Rg Iron in the United States, 280 / United Kingdom, France, and Germany. / 1830 - 1909. / / United Kingdom France. 240 220 220 ,'._ / • / t J ; 200 I — 1~ 'i- 200 180 — -- - — / n • -- 160 ISO / ;■ f^ 4 160 / ; i Y / • 1 r ' 1 f^. • 1 140 120 100 / « 1 140 120 100 1 \ / / / f \ \ i * r Tn, 1 K \ \ \ 1 / / f / / ^> / / / \ / s i J / SO :^ <" — ^■JL 7 • K / 80 1890 9 ■9; '9i '94 '95 'w ; '9- 'a 5 '9! i 19 M'O 1 '0 2 '0' i '(y » 'Oi 5 'Of 3 'Cf7 '08 ■O' 3 19 10 MITCHELL: BUSINESS CYCLES 235 TABLE 52 Value of Pig-Iron Produced in the United States, "United Kingdom, France, and Germany, and Eelative Value in Comparison "With Relative Amount of Product By Years, 1890-1909 Actual values In millions of dollars Average Relative figures actual figures 1890-99 = 100 United United ^ United States A United Kingdom France Gei-many Year States Kingdom France Gennany 'Tons Value^ Tons Value Tons Value Tons Value' 1890 151 117 27 64 98 125 99 115 88 103 79 93 1891 128 95 24 55 89 106 93 93 88 91 79 80 1892 131 84 24 55 98 108 84 82 93 91 84 80 1893 85 77 23 51 76 70 88 76 93 87 84 74 1894 65 83 23 55 72 54 93 81 93 87 91 80 1895 105 90 21 56 100 87 97 88 93 80 93 81 1896 90 101 26 71 92 74 109 99 107 99 109 103 1897 95 103 28 83 104 78 111 101 112 106 117 121 1898 117 llO 31 90 126 97 108 108 116 118 124 131 1S99 245 159 36 108 145 202 118 156 116 137 138 157 1900 260 183 43 131 147 215 113 180 126 163 145 190 1901 242 121 33 117 170 200 99 119 112 125 134 170 1902 373 137 31 108 190 308 109 134 112 118 145 157 1903 344 137 35 125 192 284 112 1S4 130 133 171 182 1904 233 124 37 124 176 192 109 122 135 141 171 180 1905 382 147 41 138 246 315 121 144 140 156 185 201 1906 506 172 51 170 270 417 127 169 153 194 209 247 1907 530 182 41 196 276 437 127 179 163 156 219 285 1908 254 140 54* 170 170 210 114 137 158 205* 200 247 1909 419 150 57* 165 276 346 121 147 163 217* 214 240 1910 425 167 191 292 351 126 164 186 252 278 Averages 1890-99 121.2 101.9 26.3 68.8 100 100 100 100 100 100 100 100 1900-09 354.3 149.3 42.3 144.4 211 292 115 147 139 161 179 210 * Provisional figures, subject to revision. Values compiled from the statistical abstracts of the several countries. American figures prepared by the U. S. Geological Survey. Values at Philadelphia 1890-94: at point of production 1895-1909. 236 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA MITCHELL: BUSINESS CYCLES 237 As representatives of the production of organic goods, where man's control over the factors determining supply is far less complete than in the cases of coal and pig-iron, we may take the wheat crops of our four countries. A comparison between Table 53 and Tables 51 and 50 shows that the factor of growth has been far less notable in the production of wheat than in the production of pig-iron and coal. The British yield has actually fallen off in recent years, the French yield has gained but a trifle. While the G-erman and American yields show distinctly higher averages in the second than in the first decade, the gains are small in comparison with those scored in the coal and iron trades, and not much greater than the increase of population. TABLE 53 Wheat Crops op the United States, United Kingdom, France, and Germany By Years, 1890-1911 Actual figures Millions of bushels A Relative figures Average actual crops 1890-99 United United States Kingdom France = 100 Tear United States United Kingdom France Germany Germany 1890 399 78 309 104 79 123 99 89 1891 612 77 219 86 122 121 70 74 1892 516 63 311 116 103 99 100 100 1893 396 52 278 110 79 82 89 95 1894 460 63 348 111 91 99 112 95 1895 467 39 340 117 93 61 109 101 1896 428 60 340 126 85 94 109 108 1897 530 58 247 120 105 91 79 103 1898 675 77 363 133 134 121 116 114 1899 547 69 364 141 109 108 117 121 1900 522 56 326 141 104 88 105 121 1901 748 56 311 92 149 88 100 79 1902 670 60 328 143 133 94 105 123 1903 638 50 364 131 127 79 117 113 1904 552 39 299 140 110 61 96 120 1905 693 62 335 136 138 97 107 117 1906 735 62 325 145 146 97 104 125 1907 634 58 377 128 126 91 121 110 1908 665 56 318 138 132 88 102 119 1909 737 65 356 138 147 102 114 119 1910 635 58 258 142 126 91 83 122 1911 621 66 315 149 123 104 101 128 Averages 1890-99 503.0 63.6 311.9 116.4 100 100 100 100 1900-09 659.4 56.4 339.9 133.2 131 89 107 115 Compiled from the Yearbooks of the Department of Agriculture. Data for 1890 from Report of the Sccreta,y of Agriculture. 1891, p. 305. 23S MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Chart 32. Relative: Wheat Crops of the United 5tate5 . United Kingdom , France , and Germany. 1890 1910. 150 MITCHELL: BUSINESS CYCLES 239 As for the changes from one phase of the business cycle to the next, there are many cases in which increased yields accompanied increased prosperity or in which poor crops and depression went together. But the correlation between volume of production and business conditions is far less perfect for wheat than for minerals. For example, note the decline in the American harvest of 1899, the British harvest of 1895, the French harvest of 1897, and the German harvest of 1907, and the increase of the American harvest in 1908, the British harvest in 1902, the French harvest in 1903, and the German harvest in 1902. In all these cases short crops occurred in a year of improving business or large crops in a year of retrogression. The figures indicate that as a business factor the wheat crop is less an effect than a cause of change in conditions, particularly in countries where agriculture emplo3rs more hands than manufactures. Good crops tend to bring prosperity and poor crops depression in the seasons which follow. But the numerous exceptions to this rule show that other factors often overbalance the effect of the harvests. To show the relation between the physical volume and pecuniary value of farm products it is siifficient to take data for corn, wheat, and cotton in America (Table 54). With pig-iron it is the rule that reduced prices and, with the exceptions noted above, increased production and high prices go together. In general, the opposite holds of crops — reduced yields cause high prices and increased yields cause low prices. Indeed, a deficiency in the yields sometimes causes such a rise of prices as to make the pecuniary value of the short crop greater than that of a large one, and superabundant yields sometimes cause such a drop in prices as to reduce their pecuniary value. Instances of the first kind occurred, for example, with corn in 1901, wheat in 1904, and cotton in 1909 ; instances of the second kind in 1894 with cotton, 1895 with corn, and 1898 with wheat. But, in the case of staples having several important sources of supply, this relation between light yields and high prices and heavy yields and low prices is far from regular. An increased yield of wheat in America was accompanied by a rise in price in 1891, 1895, 1897, 1901, 1908, and 1909, while a decreased yield was accompanied by a fall in price in 1892 and 1893. Such cases are rather less numerous with corn and cotton, of which the United States produces a much larger proportion of the world's supply. But, with corn, reduced productioh and reduced prices went together in 1892 and 1893, and increased production and increased prices in 1890 and 1900.' Thus the relations between physical production and pecuniary value are decidedly irregular with agricultural products. Neither yields nor prices are controlled to the same extent by business conditions as are the output and prices of minerals. 7 Year Book of the Department of Agriculture, 1908, pp. 598, 608, and 674-5. The prices of cotton in 1900 and 1901 are computed from Table 54. 240 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 54 Yields and Farm Values of the Coen, Wheat, and Cotton Crops By Years, 1890-1910 Corn Wheat OF the United States Cotton Actual figures Million Million bushels dollars Relative figures Av. actual figures 1890-99 = 100 A Actual figures Million Million bushels dollars Relative figures Av. actual figures 1890-99 = 100 Actual figures 10,000 Million bales dollars Relative figures Av. actual figures 1890-99 =: 100 Year Yields Values Yields Values Yields Values 1890 1,490 754 81 124 399 335 79 102 865 352 96 120 1891 2,060 836 112 137 612 513 122 155 904 312 101 106 1892 1,628 642 89 105 516 322 103 98 670 267 75 91 1893 1,619 592 88 97 396 213 79 65 755 251 84 86 1894 1,213 555 66 91 460 226 91 69 990 220 no 75 1895 2,151 545 117 89 467 238 93 72 716 259 80 88 1896 2,284 491 124 81 428 311 85 94 876 276 98 94 1897 1,903 501 104 82 530 429 105 130 1,120 356 125 121 1898 1,924 552 105 91 675 393 134 119 1,127 3H 126 107 1899 2,078 629 113 103 547 320 109 97 951 324 106 111 1900 2,105 751 115 123 522 324 104 98 1,025 470 114 160 1901 1,523 922 83 151 748 467 149 141 948 387 106 132 1902 2,524 1,017 138 167 670 422 133 128 1,078 422 120 144 1903 2,244 953 122 156 638 443 127 134 1,002 576 112 197 1904 2,467 1,087 134 178 552 510 110 155 1,370 561 153 191 1905 2,708 1,117 148 183 693 518 138 157 1,073 557 120 190 1906 2,927 1,167 159 190 735 490 146 148 1,331 640 148 218 1907 2,592 1,337 141 219 634 554 126 168 1,133 553 126 189 1908 2,669 1,616 145 265 665 617 132 187 1,343 551 150 188 1909 2,772 1,653 151 271 737 730 147 221 1,039 688 116 235 1910 2,886 1,385 157 227 635 561 126 170 1,197 820 133 280 1911 2,531 1,565 138 257 621 543 123 165 Averages 1890-99 1,835.0 609.7 100 100 503.0 330.0 100 100 897.4 293.1 100 100 1900-09 2,453.1 1,162.0 134 191 659.4 507.5 131 154 1,134.2 540.5 126 184 Compiled from A. P. Andrew, Statistics for the Document no. 570, 61st Congress, 2d session; pp. States. United States. (Publications of tlie National Monetary Commission), Senate 14, 15. The data for 1910-11 are from the Statistical Abstract of the United MITCHELL: BUSINESS CYCLES 241 CHART 53. Relative Yields and Farm values of the wheat crops OF THE UNITED STATES . 220 'V 1890 - 1910. / / / / 1 1 \ \ \ \ \ \ \ 200 VALUES. 1 1 1 \ \ \ 1 < \ i / 180 / 180 / / / t . / 160 / 1 1 ^r% » 160 i , 1 / j f ' ' <" ^ / ! i i 1 i / ^ / ' 5 / v 1 / \ A , / A ' /\ 140 / i \ / i / \ 1 / \ 140 1 , / 1 / \ ii \\ / / ' \ / li \\ f / \ / A 1 \ \' / \ > r ^ / \ /' \ \ / \ / i\l \ // > L / V 1 1 \ ' \ / 1 120 100 1 /\ \ 11 \ / , 120 100 1 \ 1 1 \ \ \ \ 1 \ / / / / 1 \ / \ ^^ ■* / \\ V / / / \\ / v / / \\ / x / f \\ / I do \ \ / 1 80 \ r • 1 1 1 \ y x- • 1890 91 92 '9i '94 '95 '96 '97 '98 '99 1900 'Ol 'OZ '03 '04 'O. 3 '06 '07 '08 '09 1910 242 MEMOIRS OP THE UNIVERSITY OP CALIPORNIA IV. The Yolitme of Domestic Trade Since every business enterprise of any size directly or indirectly makes use of the railways on the one hand and on the other hand of the banks, the records of railway traffic and bank transactions afford perhaps the best single gauges of the amount of business going on within the limits of a country. Gross receipts from operations are the most readily comparable among the various records of railway traffic. These figures, assembled in Table 55, show the United States in the lead, with respect to absolute amounts, rate of growth, and violence of fluctuations. Germany ranks second, the United Kingdom third, and France last, though there is little difference between the rate of growth in the two latter countries. Except in the United States, periods of business depression do little more than to interrupt the expansion of railway traffic for a single year. Germany shows a decline of 3 per cent in 1901 and TABLE 55 ;s Eaenings of the Bail WATS OF THE United States, United Kingdom, France, AND Germany Actual amounts Millions of dollars A Relative amounts Average actual amounts 1890-99 United United States Kingdom France - 100 Year United States United Kingdom France Germany Germany 1890 1,052 373 223 310 91 92 91 85 1891 1,097 381 229 320 94 94 94 88 1892 1,171 382 228 321 101 94 93 88 1893 1,221 374 233 335 105 92 95 92 1894 1,073 389 238 336 92 96 97 92 1895 1,075 396 244 357 92 98 100 98 1896 1,150 415 250 378 99 102 102 103 1897 1,222 430 258 399 105 106 106 109 1898 1,247 443 267 438 107 109 109 120 1899 1,314 466 275 463 113 115 112 127 1900 1,487 481 293 483 128 119 120 132 1901 1,589 485 281 470 137 120 115 129 1902 1,726 497 285 482 149 123 117 132 1903 1,901 502 290 515 164 124 119 141 1904 l,97o 505 292 540 170 125 119 148 1905 2,082 512 304 580 179 126 124 159 1906 2,326 527 318 626 200 130 130 171 1907 2,589 546 328 653 223 135 134 179 1908 2,394 538 335 642 206 133 137 176 1909 2,419 539 340* 677 208 133 139* 185 1910 2,751 556 723 237 137 198 Averages 1890-99 1,162.2 404.9 244.5 365.7 100 100 100 100 1900-09 2,048.8 513.2 306.6 566.8 176 127 125 155 * Provisional figures. Compiled from the Statistical Reports of the Interstate Commerce Commission and from the statistical Kingdom, France, and Germany. With the possible exception of France, the figures show gross receipts American figures are for years ending June 30. abstracts of the United from operations. The MITCHELL: BUSINESS CYCLES 243 CHART 54. < j Relative Gross earnings of the railways of the UNITED STATES. UNITED KINGDOM , FRANCE , AND GERMANY. / \ 1 ppn 1890-1910. / \ / UNITED STATES. / \ -^ UNITED Kingdom. -i zoo FRANCE. / GERMANY. / ISO / I- f / / / t "•n t » 1 ISO 160 / / / 9 9 1 9 t i t 9 9 # 160 140 120 100 SO I2Q lOO SO * • * I 1 » ,. / / / < ^'' t / -•*^ ^ * / u \ .^■" ^'^ /^ .'-' L *•> ,: 1 y 1 1890 '91 '92 '93 '94 '95 '96 '97 '98 '99 1900 'Ol '02 "05 '04 '05 '06 '07 '02 '09 1910 244 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA 1908 ; France of 1 per cent in 1892 (perhaps because of the reduction in railway rates brought about by a change in the tax laws) , and one of 5 per cent in 1901, the year following a great international exposition ; the United Kingdom shows a decline of 2 per cent in both 1893 and 1908.^ The wider fluctuations of American business are shown by decreases of 13 per cent in 1894 and 17 per cent in 1908. But while the volume of traffic shrinks little in Europe even in periods of severe depression, it grows at a pace considerably faster than the average when prosperity reigns. The maximum increases from one year to the next are 12 per cent in Grermany (1906), 8 per cent in France (1900), and 6 per cent in England (1899). Again the United States with an increase of 23 per cent (1907) far surpasses the other countries. Judged by this standard, then, the volume of domestic trade is subject to so large a factor of growth that it contracts but a trifle when business is dull, and shows the effects of business cycles mainly by expanding faster than usual when business is brisk. Amer- ican business, however, is subject to more violent oscillations than European. It is only in England and the United States that bank clearings are a trust- worthy gauge of volume of trade. In France and Grermany bank notes, bank transfers, domestic bills of exchange, etc., are used for many of the transactions effected in the Anglo-Saxon countries by checks, and bank clearings accord- ingly are comparatively small. For the sake of completeness, the Parisian and German clearings are shown in Table 56; but these figures have little value aside from indicating that the use of checks has made relatively rapid progress since 1890. As indices of the volume of domestic trade, the American and English clearings show wider variations than do railway receipts. The factor of growth is larger in clearings ; but nevertheless the decreases in times of depression are greater and last longer. But the discrepancies between the testimony borne by the two sets of data are more apparent than real. Clearings are more affected than railway receipts by changes in prices, which Chapter IV showed to be large in the period covered by the tables. Even when subject to no govern- mental regulation, it is notoriously difficult for railways to readjust their complicated schedules promptly as the level of prices rises and falls. Hence clearings vary more than railway receipts for much the same reason that the value of pig-iron varies more than the output. Second, speculation in stocks and commodities exerts a powerful infiuence upon the volume of clearings, while it does not perceptibly affect the earnings of railways. And such speculation is a branch of trade peculiarly susceptible to wide and sudden fluctuations. How important is this second factor may be judged from the difference between the course followed by clearings in New York and by clearings in the rest of the countr}^ The latter clearings decline somewhat more than railway receipts in times of depression when prices are falling and speculation is stag- s These percentages are based on the average annual receipts of 1890-99. MITCHELL: BUSINESS CYCLES 245 TABLE 56 Bank Clearings in the IFnited States, England, France, and Germany By Years, 1890-1911 Actual amounts In hundreds of millions of dollars Relative amounts Average actual amounts 1890-99 = 100 Onited States London Paris Germany United States A London Paris New York Outside New York Year No. of clearing houses Amount of clearings No. of clearing houses Amount of clearings Outside New New York York Germany 1890 375 55 231 380 12 9 43 105 94 106 88 84 • 1891 337 55 229 333 9 9 42 94 93 93 66 82 1892 367 66 253 315 9 9 40 102 103 88 66 78 1893 313 73 229 315 10 9 43 87 93 88 74 84 1894 244 78 211 308 12 9 43 68 86 86 88 84 1895 298 78 233 370 14 9 50 83 95 103 103 98 1896 289 82 224 369 15 9 54 81 91 103 no 106 1897 334 82 238 365 16 9 57 93 97 102 118 112 1898 420 82 269 394 18 10 67 117 110 110 132 131 1899 608 82 333 445 21 10 72 170 136 124 154 141 1900 526 86 334 436 21 10 70 147 136 121 154 137 1901 794 90 390 465 19 10 69 221 159 129 140 135 1902 763 93 417 488 21 11 71 213 170 136 154 139 1903 660 97 432 492 23 11 74 184 176 137 169 145 1904 686 97 439 514 27 11 78 191 179 143 199 153 1905 938 107 500 598 34 12 89 262 204 166 250 174 1906 1,047 113 552 619 48 13 100 292 225 172 353 196 1907 872 113 578 620 50 14 108 243 236 173 368 211 1908 793 113 531 590 52 17 109 221 217 164 382 213 1909 1,036 111 622 658 61 289 254 183 375 1910 973 668 713 66 271 273 198 485 1911 924 676 711 58 258 276 198 426 Averages 1890-99 358.5 245.0 359.4 13.6 51.1 100 100 100 100 100 1900-09 811.5 479.3 548.0 34.6 226 196 152 254 A • „ «„„^a. t^nTT, tho Fiyinnrial Review (calendar years) ; English and German figures from Statistics for Great Britain, American figures from the |.na«emi^«me^ Oommisfion), Senate Document no. 578, 61st Congress, 2d Session pp'.™rLd 152rFrench figurlsZ de France, 1908, p. 65*, and La riforr^e iconomique. The French figures are for years heginning April 1. 246 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA ChART 35. RELATIVE Bank Clearings in New York, Outside New York, and in London. \ zao / 1 \ 1890 - 1911. / \ / / \ 260 / Outside New York 1 London ' \ 1 f If 240 \ 1 \ 1 1 ,\ 1 1 A 220 / 1 i \ 1 r 220 \ \ / 1 1 1 \ ?nn , \ i 200 1 \ . / ; / \ / / / / / / ISO ( 180 1 1 ^ / 1 / / / '■• \ / / / \ / leo \ / / / ■' Ifin I \ / / / 1 \ / / 1 \ / / 1 / i i4n 140 1 — 1 / -■• f 1 i / / ''r V / 120 120 i t 100 \ i ^ — -~ f \ f \ / -^ ( N \ \ 1 / i so \ y f 80 \ / 1890 '91 '92 93 '94 '95 '96 '37 '98 '99 1900 'Ol '02 '03 '04 '05 'OS 07 08 '09 1910 'l 1 MITCHELL: BUSINESS CYCLES 247 nant, and advance somewhat more in times of prosperity when prices are rising and speculation is rampant. But the margins between the relative figures for these country clearings and for railway receipts are narrower than the margins between country clearings and New York clearings. More than almost any other branch of business, stock speculation is concentrated in New York. The establishment of the Stock Exchange Clearing House in May, 1892, relieved the banks from much of the work they formerly did in connection with stock dealings, and was partly responsible for the decline in the volume of New York clearings in the years which f ollowed." But the purchase of stocks still requires a heavy use of bank checks, so that an increase of activity upon the stock exchange is always reflected at the bank clearing house. Hence the rough concomitance, shown by Table 57, between the changes in the number of shares sold and in the volume of clearings. On the whole, the clearings are steadier than the stock sales, because the other branches of trade which require the use of checks fluctuate less wildly than does speculation in stocks. But the contribution made by the stock exchange to bank clearings is so huge as to invalidate the use of the New York figures as a gauge of the activity of general business. The country clearings are a far more trustworthy witness, and, as has been pointed out, their testimony agrees well with that borne by railway receipts, after allowance has been made for changes in prices, and for the measure of speculation which enters into every branch of trade. London clearings agree with British railway receipts in much the same manner that country clearings in the United States agree with American rail- way receipts. Of course, under the influence of changes in prices and specu- lation they fall off more than railway receipts in the middle nineties, and rise more in the second decade. Stock exchange transactions, however, cut a less figure at the London than at the New York clearing house, largely because the London exchange makes fortnightly instead of daily settlements. Hence the London figures are a less accurate gauge of volume of speculation and a more accurate gauge of volume of general trade than the New York figures. Like the indices previously examined, bank clearings show a smaller factor of growth in English than in American business. But this difference does not prevent the series for London and for the United States outside of New York from reflecting the agreements and disagreements pointed out in Chapter III between the course of business cycles in the two countries. Since bank clearings are so small in France and Germany, it is advisable to seek some other gauge of the domestic volume of trade. The wide use of the domestic bill of exchange by business enterprises of every kind in Europe gives this instrument of credit a significance as an index of volume of business transacted not unlike that of the bank check in Anglo-Saxon countries. More- 9 Financial Review, 1893, p. 12. 248 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 57 Number or Shares Sold on the New York Exchange and Bank Clearings in New York City Bt Years, 1890-1911 Actual amounts Relative amounts Average actual amounts in 1890-99 = 100 A Shares sold. Millions of shares Bank clearings. Hundreds of millions of dollars Year Shares sold Bank clearings 1890 71 375 84 105 1891 69 337 82 94 1892 86 367 102 102 1893 81 313 96 87 1894 49 244 58 68 1895 67 298 79 83 1896 S5 289 65 81 1897 77 334 91 93 1898 113 420 134 117 1899 176 608 209 170 1900 138 526 164 147 1901 266 794 315 221 1902 189 763 224 213 1903 161 660 191 184 1904 187 686 222 191 1905 263 938 312 262 1906 284 1,047 336 292 1907 196 872 232 243 1908 197 793 233 221 1909 215 1,036 255 289 1910 164 973 194 271 1911 127 924 150 258 Averages 1890-99 84.4 358.5 100 100 1900-09 209.6 811.5 248 226 Data from the Financial Review. over, the imposition of stamp taxes upon such bills supplies data from which the amount in circulation from year to year may be estimated with approximate accuracy." 10 On the value of these data as a gauge of business activity see K. Helfferieh, Der deutsche GeldmarTct 1895 iis 190S (Sohriften des Vereins fiir Socialpolitik, vol. 110), p. 27. The German figures are computed from the receijpts of the Wechselstempelsteuer by a formula used by the Eeischsbank in compiling its anniversary volume for the years 1876-1900. The tax receipts (at the rate of one-half per mille) are capitalized, and from the sum 10 per cent is deducted as an allowance for the lower rate of taxation upon large bills. The amounts of bills on which the French tax is collected are given in the Annuaire statistique, 1908, p. 90.* Two errors of the press have been corrected in changing these figures into American money. That the original data are not in thousands but in millions of francs appears from p. 3* and from a comparison between the amount of the tax and the amount of the bills. The first digit in the amount for 1898 should be 3 instead of 2. MITCHELL: BUSINESS CYCLES 249 Chart 36. 340 Relative Number of Shares sao oi the NEW York Stxk Exchange and i Relative Bank Clearings in NewYork City j ' 1890-1911. LI/ 320 1 BANK CLEARINGS. 300 280 1 1 1 \ 280 1 r 1 j \ 260 1 1 1 260 1 ' 240 . i f 240 1 i \ f 1 V! T| 1 220 1 220 1 1 \ l\ \\ ll ll / 1 L ISO 1 1 \ 1 160 160 1 1 1 \i \ ■ 1 140 140 120 1 120 / // If 100 I \ 100 A 1 /j 80 * / ^^' / 80 fiO \l \l 1 60 1 1890 '91 '92 33 '94 '35 '96 '97 '9 8'£ 9 190 O'OI I 2 bS 04 05 Oe '07 08 '09 1910 'll 250 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA These figures, presented in Table 58, agree more closely with, railway receipts in their respective countries than do bank clearings in America and England. They fall more than railway receipts during years of depression and rise more during years of prosperity; for, of course, the amount of bills of exchange in circulation is affected by changes in the price level. The reason why these divergencies are smaller than the corresponding divergencies between clearings and railway receipts in America and England appears to be that bills of exchange, based mainly upon the sale of actual commodities, are less affected by speculation than are bank clearings. Finally, the differences between the increase from the first to the second decade in the volume of bills outstanding in Prance and Germany confirm the conclusion drawn from earlier tables that German business has been expanding at a considerably faster pace than French business in the last twenty years. TABLE 58 [LLS OF Exchange IN Circulation IN France AND German By Tears, 1890- -1910 Actual amounts In tens of millions of dollars Relative amounts Average actual amounts in 1890-99 = 100 Year France Germany France Germany 1890 542 335 99 86 1891 551 350 101 90 1892 524 339 96 87 1893 525 350 96 90 1894 509 349 93 89 1895 514 374 94 96 1896 539 394 99 101 1897 556 426 102 109 1898 586 471 107 121 1899 611 516 112 132 1900 621 558 114 143 1901 596 532 109 136 1902 594 517 109 132 1903 625 536 115 137 1904 647 561 119 144 1905 668 629 122 161 1906 733 676 134 173 1907 769 743 141 190 1908 751 703 138 180 1909 778 794 143 203 1910 844 803 155 206 1911 838 215 Averages 1890-99 545.7 390.4 100 100 1900-09 678.2 629.9 124 160 Data obtained from the statistical abstracts of Prance and Germany. For method of computing the amount of bills from the stamp-tax receipts in Germany see preceding note. The German figures are for the fiscal years beginning April 1. MITCHELL: BUSINESS CYCLES 251 \ y 200 CHART 37. 1 1 1 1 1 Relative Amounts of Bii-if. of Exchange IN Circulation in France: and Germany. 1890 - 1910. 190 ISO \ I 1 1 I 1 1 1 1 1 1 t / \1C\ Germany". / leo J 1 160 / / / 150 140 ISO 120 no 100 / 150 t \ / / J V / 140 / 1 1 t \ \ • • / 1 / N / / / 1 ^/ 1 120 no 100 / / / / \ / / r \. / / / / / / N \ - s. i '/ ** 90 ■v f 90 ^v y 1890 91 '92 93 94 '95 '96 '97 '98 '99 1900 'Ol 'OE '03 '04 '05 'OG '07 "OS '09 1910. 252 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA V. The Volume op Foreign Commerce Table 59, which brings together the grand totals of foreign commerce for our four countries as nearly as may be in comparable shape, shows that in this branch of business the United States is far surpassed by the United Kingdom, and surpassed also by Germany in volume of imports, though not in volume of exports. Prance, as usual, ranks last. Even in rate of increase the United States takes second place, Germany ranking first, England third, and Prance fourth. It is worthv of remark that in each of the countries the increase of TABLE 59 Merchandise Imports and Exports of the United States, United Kingdom, Prance, and Germany By Years, 1890-19] 1 Actual amounts in millions of dollars United States A United Kingdom France Special trade Germ Special any 1 trade TlATYIOCtl.. Year Imports exports imports exports Imports Exports Imports Exports 1890 823 858 1,732 1,282 856 724 990 792 1891 828 971 1,818 1,203 920 689 988 756 1892 841 938 1,749 1,106 808 668 956 703 1893 776 876 1,683 1,062 744 625 943 736 1894 676 825 1,706 1,051 743 594 937 705 1895 802 825 1,737 1,100 718 651 981 790 1896 682 1,006 1,876 1,169 733 656 1,025 839 1897 743 1,100 1,903 1,140 764 694 1,114 865 1898 635 1,256 1,995 1,136 863 678 1,209 894 1899 799 1,275 2,044 1,287 872 801 1,305 1,001 1900 829 1,478 2,238 1,417 907 793 1,372 1,098 1901 880 1,465 2,210 1,363 843 774 1,290 1,055 1902 969 1,361 2,251 1,379 848 821 1,340 1,113 1903 995 1,485 2,302 1,415 927 821 1,429 1,193 1904 1,036 1,451 2,340 1,463 869 859 1,512 i;243 1905 1,179 1,627 2,372 1,605 922 939 1,697 1,364 1906 1,321 1,798 2,545 1,828 1,086 1,016 1,909 1,513 1907 1,423 1,923 2,696 2,073 1,201 1,080 2,082 1,629 1908 1,116 1,753 2,498 1,835 1,089 975 1,824 1,523 1909 1,476 1,701 2,595 1,840 1,205 1,104 2,028 1,569 1910 1,563 1,829 2,796 2,094 1,384 1,203 2,126 1,779 1911 1,533 2,058 2,812 2,211 1,575* 1,191* 2,310 1,929 Averages 1890-99 760.5 993.0 1,824.3 1,153.6 802.1 678.0 1,044.8 808.1 1900-09 1,122.4 1,604.2 2,404.7 1,621.8 989.7 918.2 1,648.3 1,330.0 * Provisional figures Figures for United States (calendar years) from A. P. Andrew, Statistics for the United States (Publications of the National Monetary Commission), Senate Document no. 570, 61st Congress, 3d Session, p. 10. Figures for foreign countries compiled from the (American) Statistical Abstract for Foreign Uotintries, 1909, pp. 21, 22, and 42. The foreign figures for 1906-11 are com- puted from tables in the British, IVench, and German statistical abstracts, or from preliminary reports in the business journals. MITCHELL: BUSINESS CYCLES 253 Merchandise Imports and Exports TABLE !y9— (Concluded) OP THE United States, United Kingdom, France, and Germany By Yeabs, 1890-1911 Relative amounts Average actual amounts 1890-99 = 100 United States United Kingdom Net Domestic imports exports France Special trade Gern Specia aany Imports Bomestic exports 1 trade Imports Exports Imports Exports 1890 108 86 95 111 107 107 95 98 1891 109 98 100 104 115 102 95 94 1892 111 94 96 96 101 99 92 87 1893 102 88 92 92 93 92 90 91 1894 89 83 94 91 93 88 90 87 1895 105 83 95 95 90 96 94 98 1896 90 101 103 101 91 97 98 104 1897 98 111 104 99 95 102 107 107 1898 88 126 109 98 108 100 116 111 1899 105 128 112 112 109 118 125 124 1900 109 149 123 123 113 117 131 136 1901 116 148 121 118 105 114 123 131 1902 127 137 123 120 106 121 128 138 1903 131 150 126 123 116 121 137 148 1904 136 146 128 127 108 127 145 154 1905 155 164 130 139 115 138 162 169 1906 174 181 140 158 135 150 183 187 1907 187 194 148 180 150 159 199 202 1908 147 177 137 159 136 144 175 188 1909 194 171 142 160 150 163 194 194 1910 206 184 153 182 173 177 203 220 1911 202 207 154 192 196* 176* 221 239 Averages 1890-99 100 100 100 100 100 100 100 100 1900-09 148 162 132 141 123 135 158 165 * Provisional figures. exports has exceeded that of hnports. Every year the United States has so- called favorable balances of trade, while the European countries, except Prance in 1905, have unfavorable balances. The close' dependence of the pecuniary volume of foreign trade upon business cycles is stamped upon this table. Both imports and exports rise in years of prosperity, and both decline in years of depression. A few exceptions to this rule are brought about by causes not originating in the world of business. For example, 1891 was a dull year, yet imports increased in Europe and exports in the United States, because of the short European and abundant American harvests; 1897 and the first half of 1898 was a period of business revival in England, yet British exports declined a little because of famine in India, 254 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA 1890 91 '92 '93 '94 95 'SG '97 '38 '99 1900 'o I '02 '03 '04 "05 '06 '07 '08 '09 1910 'll MITCHELL: BUSINESS CYCLES 255 CHART 39. • Relative Exports of Merchandise from the • 210 • • United 5tates. United Kingdom , France , and Germany. 1 • • • • 1 1890 - 1911. • • • ■ fl • / I • 190 United States. • 1 # .' / 170 160 130 140 United Kingdom. • • \ > t 180 170 160 150 140 • — '^'-^ France. Germany. • / 1 1 f f ; \ \ \ \ \ // // f 1 • • • • i ' f / / f / \ \ \ \ / 1 t / 1 / 1 1 1 1 / • / ♦ \ • \ '7 / 1 \ / ^ it !/ r." • 1 130 120 no 100 so • • • i i I f 130 120 110 100 90 / • • • • * \ ^- J • f f / / • r > / \ A. I a i! •••/ ^ S- '''4 • 1 * .A ^ » 1 IB90 "91 92 '93 '94 '95 '9G '97 '98 '99 1900*01 '02 '03 '04 '05 '06 '07 '08 '09 1910 'h 256 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA drought in South Africa, poor crops and political unrest in South America, the Dingley tariff in the United States, the Spanish-American War, and the Fashoda incident;" two of these same factors — the Dingley tariff and the Spanish War — were chiefly responsible for the decline of imports into the United States in the prosperous year 1898, etc. Apparent exceptions to the rule may also be brought about by a difference in the coiirse of business in different countries. Thus in 1901, when Europe was visited by depression, both imports and exports declined; while the United States, still prosperous, increased its imports, but suffered a decline of exports, because its leading customers bought less freely. This case suggests a difference in the character of the relation borne by business conditions toward imports and toAvard exports. Prosperity at home tends directly to increase imports, but to decrease exports. For the large domestic demand and the rising prices which accompany prosperity make pro- ducers less dependent upon foreign markets. On the contrary, while depression clearly decreases imports, there is reason to expect that it should increase exports. For the lower level of prices at home and the reduced domestic demand make producers more eager to sell goods abroad. Since the movement of exports usually contradicts these expectations, the reason must be not only that business cycles run a substantially similar course in countries having important commercial relations, but also that business conditions among the customer nations have more influence upon the volume of exports than business conditions among the producers. It is occasionally said that prosperity works its own undoing through the effects it produces upon foreign commerce. The argmnent is that, by encour- aging imports and discouraging exports, prosperity reduces a favorable and augments an unfavorable balance of trade upon merchandise account, and therefore tends to produce an outflow of gold. In turn, the latter reduces bank reserves, causes a restriction of credit, and so brings the movement of expansion to a close. With the international movements of gold and their effects upon business cycles, we are not yet ready to deal. But it is pertinent to examine the relation between business conditions and the balance of trade in merchandise. For this purpose, the excesses of exports over imports or of imports over exports have been computed from Table 59 and set down in Table 60. The figures do not give unequivocal support to the above stated theory. For example, Eng- land's excess of imports was greater in the dull years 1901-04 than in the brisk years 1905-07; America's excess of exports rose with the rise of prosperity from 1904 to 1907; France's greatest excess of imports came in the dull years 1891 and 1911, and Germany's excess of imports declined in 1899 — the annus ynirabilis. But the cases which support the theory are more numerous. As a rule the excess of exports in America has fallen at the culmination of a period 11 See the Economist's Commercial History and Review of 1897 and 1898. MITCHELL: BUSINESS CYCLES 257 of prosperity and risen in the subsequent period of depression. Mutatis mutandis, the rule holds good also for France and Germany. The truth seems to be that prosperity in a given country does stimulate imports and check exports ; but that this effect is often offset by counter-influences, such as fluctu- ations in the harvest and business conditions among customer or competitor nations. The elaborate form in which statistics of foreign trade are published makes it possible to examine the influence exercised by business cycles upon exports TABLE 60 Excess of Merchandise Imports Over Exports ( — ) or or Exports Over Imports (-|-) in the United States, United Kingdom, France, and Germany By Years, 1890-1911 Actual amounts in millions of dollars Year 1890 United States + 35 United Kingdom —450 France —132 Germany —198 1891 +143 —615 —231 —232 1892 + 97 —643 —140 —253 1893 + 100 —621 —119 —207 1894 +149 —655 —149 —232 1895 + 23 —637 — 67 —191 1896 +324 —707 — 77 —186 1897 +357 —763 — 70 —249 1898 + 621 —859 —185 —315 1899 +476 —757 — 71 —304 1900 + 649 —821 —114 —274 1901 +585 —847 — 69 —235 1902 +392 •—872 — 27 —227 1903 +490 —887 —106 —236 1904 +415 —877 — 10 —269 1905 +448 —767 + 17 —333 1906 +477 —717 — 70 —396 1907 +500 —623 —121 —453 1908 +637 —663 —114 —301 1909 +225 —755 —101 —459 1910 +266 —702 —181 —347 1911 +525 —601 —384* —381 Averages 1890-90 +232.5 —670.7 —124.1 —263.7 1900-09 +481.8 —782.9 — 71.5 —318.3 * Provisional figures. Compiled from Table 59. 258 MEMOIRS OP THE UNIVERSITY OP CALIFORNIA and imports in great detail. It will suffice for present purposes to take the three grand divisions under which exports and imports of merchandise are classified: foodstuffs, raw materials, and manufactured goods/^ Tables 61 and 62 show that the correlation between business conditions and imports and exports of foodstuffs is far from close. Whether the changes from TABLE 61 Relative Imports op Foodstuffs, Raw Materials, and Manufactured Products Into the United States, France, and Germany By Years, 1890-1911 Average actual amounts in 1890-99 = 100 Average actual amounts Foodstuffs Raw materials Mar lufactured i :oods United States France Germany United States France Germany United States France Germany 1890-99 261.6 237.1 361.8 185.5 446.0 457.3 303.8 119.1 225.4 1900-09 266.6 171.4 511.0 357.3 637.4 843.9 456.1 181.2 293.5 Tear 1890 100 118 92 92 103 92 115 100 104 1891 114 135 100 99 106 90 117 108 95 1892 120 114 99 101 94 86 104 100 90 1893 109 86 87 113 96 91 120 91 95 1894 110 98 95 70 91 87 76 89 88 1895 95 84 91 98 91 94 97 95 98 1896 95 82 97 107 94 98 108 100 99 1897 99 84 106 106 100 109 101 99 102 1898 73 123 120 102 102 117 76- 100 107 1899 85 77 114 113 123 136 86 118 121 1900 88 67 116 149 131 146 111 137 127 1901 90 64 125 134 122 128 110 125 112 1902 83 67 130 163 121 133 125 126 116 1903 90 78 128 178 131 148 149 133 128 1904 96 66 129 173 123 165 136 135 129 1905 111 67 154 210 13^ 180 142 141 140 1906 105 77 153 224 160 229 174 162 137 1907 118 84 161 257 174 256 210 190 147 1908 112 76 149 196 155 216 174 181 131 1909 126 77 168 243 178 244 171 191 135 1910 125 115 163 305 188 265 215 229 144 1911 135 162* 197 276 201* 274 214 248* 152 Averages 1890-99 100 100 100 100 100 100 100 100 100 1900-09 102 72 141 193 143' 185 150 152 130 * Provisional figures. Compiled from data in the statistical abstracts of the several countries. The American figures are for years ending June 30. 12 Great Britain is excluded from the following comparisons, because I have not found the threefold classification carried back to 1890 in the available documents. To make the fivefold American classification correspond as closely as may be with the less detailed French and German tables, I have combined crude with manufactured foodstuffs, and "manufactures for further use in manufacturing" with "manufactures ready for consumption. ' ' Since these American figures are for fiscal years, they do not tally with the Amer- ican figures for calendar years in Table 59. MITCHELL: BUSINESS CYCLES 259 year to year or from decade to decade be examined, it appears that international trade in food is controlled quite as much by the harvests as by the alternations of business activity and stagnation. But these figures do throw light upon the general trend of economic development in the three countries. Prance has become distinctly less and Germany distinctly more dependent upon foreign supplies of food since 1890, while American imports of this character have increased but a trifle, despite the rapid growth of population. TABLE 62 Relative Exports or Eoodstuffs, Baw Materials, and Manufactured Products Prom the United States, France, and Germany By Years, 1890-1911 Average actual amounts in 1890-99 = 100 Average actual amounts Foodstuffs A Raw materials A Manufactured goods United States France Germany United States France Germany United States France Germany 1890-99 419.6 137.1 106.8 286.7 171.5 179.6 241.1 369.5 521.3 1900-09 499.4 142.6 127.9 461.4 251.6 325.3 585.5 524.7 876.8 Year 1890 85 120 105 106 101 94 74 105 98 1891 79 114 98 121 94 91 78 101 93 1892 122 107 82 110 93 84 76 98 89 1893 95 100 95 86 88 89 74 91 91 1894 91 94 92 96 85 89 84 87 86 1895 76 83 93 92 98 96 85 100 99 1896 83 92 101 88 94 102 107 100 105 1897 99 102 115 104 106 108 129 101 105 1898 141 93 112 100 105 113 135 100 109 1899 128 95 107 97 136 135 158 118 124 1900 130 108 115 114 122 147 201 118 136 1901 139 105 101 139 115 144 193 117 132 1902 122 100 95 130 132 154 188 124 141 1903 121 93 114 143 132 162 194 126 150 1904 106 98 117 161 137 167 217 133 157 1905 96 110 113 165 151 186 253 144 174 1906 125 100 128 175 166 198 285 161 196 1907 122 105 123 207 170 219 307 175 212 1908 124 105 142 194 151 209 311 155 191 1909 104 116 150 182 191 226 278 167 192 1910 88 121 170 197 217 254 318 180 219 1911 92 102* 178 249 216* 269 376 184* 241 Averages 1890-99 100 100 100 100 100 100 100 100 100 1900-09 119 104 120 161 147 181 243 142 168 * Provisional figures. Compiled from data in the statistical abstracts of tbe several countries. The American figures are for years ending June 30, 260 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA MITCHELL: BUSINESS CYCLES 261 Chart 41. 210 Relative: Imports of Manufactured Goods into the ^ /J United States , France , and Germany 1890 -1910. / \ 11 ll 200 \ ll 1 1 / \ t f / 190 180 / / / / France. 1 \ Germany. ii ^ 170 1 1 160 1 1 1 160 / f ll ll ll 150 1 "in 140 \ A • i • /40 130 120 ■ / / \ • ••••.. • • • • ■ • • • • 130 420 / /.. /.♦ • • • 7 • ^ V / • ' • •• /■' 110 100 90 80 \ / 1 r no 100 90 80 / . / V \ / 1 / )> ■/ / / • ■ • \ • 1 • 1 yj / / ic! re eT ^ ^ \ \ / / ( wl to' 36 m 1 ) ' \ / \ ^ ^ / 1890 '91 '92 '93 '94 '95 '96 '97 '98 '99 1900 'oi '02 '03 '04 '05 '06 '07 '08 'OS 1910 262 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA The fairly close correspondence established by Table 59 between the volume of foreign commerce and business cycles is confined almost wholly to imports and exports of raw materials and manufactured goods. Occasional breaks in the parallelism are caused by changes in tariffs, by wars, by the influence of crops on purchasing power, and other factors not directly connected with busi- ness activity ; but, as a rule, imports rise when times are good at home, exports rise when times are good abroad, and vice versa. The chief purpose of the next table is to show that these classes of com- modities which do fluctuate in harmony with business cycles make a smaller proportion of American than of foreign trade. Particularly as an exporter, America deals more largely in foodstuffs than France or Germany. On the other hand, more than half of the French and German exports consist of manu- factured goods." Conversely, among imports, manufactured goods take the lead in America, raw materials in France and Germanj^" An exaggerated idea of the relative magnitude of foreign as compared with domestic trade is made by the fullness of the statistics for the former and the scantiness of the statistics for the latter. Lacking records for the value of goods bought and sold in interior markets, we are unduly impressed by the imposing totals of imports and exports furnished by the customs houses. But TABLE 63 Analysis of the Merchandise Imports and Exports of the United States, France, and Germany, by Decades, 1890-1909 Imports Average actual amounts in millions of dollars K United States France Germany ^ K ^ ^ A A 1890-99 1900-09 1890-99 1900-09 1890-99 1900-09 Foodstuffs 261.6 266.6 237.1 171.4 361.8 511.0 Baw materials 185.5 357.3 446.0 637.4 457.3 843.9 Manufactured goods 303.8 456.1 119.1 181.2 225.4 293.5 Total 750.9 1,080.0 802.2 990.0 1,044.5 1,648.4 Relative amounts Total actual amounts = 100 ^ A ___^ United States Prance Germany ' ' < , * , , ' , 1890-99 1900-09 1890-99 1900-09 1890-99 1900-09 Foodstuffs 34.8% 24.7% 29.6% 17.3% 34.6% 31.0% Eaw materials 24.7 33.1 55.6 64.4 43.8 51.2 Manufactured goods 40.5 42.2 14.8 18.3 21.6 17.8 Total 100.0 100.0 100.0 100.0 . 100.0 lOO.O 13 The United States, however, has been making rapid progress in the exports of manufactured goods so that in the second decade this class- of merchandise exceeded foodstuffs in value. 14 Certain slight discrepancies — less than $1,000,000 in all cases — may be noted between the decennial aver- ages for France and for Germany in tables 59 and 63. The large American imports of foodstuffs consist chiefly of such articles as sugar, coffee, tea, tobacco, fruits and nuts, etc. MITCHELL: BUSINESS CYCLES 263 TABLE 6S— (Concluded) Analysis op the Merchandise Imports and Exports of the United States, Prance, and Germany, by Decades, 1890-1909 Exports Average actual amounts in millions of dollars , A . r ^ United States Prance Germany A > _A 1890-99 1900-09 1890-99 1900-09 1890-99 1900-09 Foodstufes 419.6 499.4 137.1 142.6 106.8 127.9 Eaw materials 286.7 461.4 171.5 251.6 179.6 325.3 Manufactured goods 241.1 585.5 369.5 524.7 521.3 876.8 Total 947.4 1,546.3 678.1 918.9 807.7 1,330.0 Relative amounts Total actual amounts = 100 A United States ' Prance Germany ^\_ > A 1890-99 1900-09 1890-99 1900-09 1890-99 1900-09 Foodstuflfs 44.3% 32.3% 20.2% 15.5% 13.2% 9.6% Eaw materials 30.3 29.8 25.3 27.4 22.2 24.5 Manufactured goods 25.4 37.9 54.5 57.1 64.6 65.9 Total 100.0 100.0 100.0 100.0 100.0 100.0 Compiled from data in the statistical abstracts of the several countries. The American figures are for years ending June 30. An error in the Prench figures for imports of raw materials in 1897 has been corrected. " an effort to cast up corresponding totals for domestic trade shows that it must be vastly greater in volume. Professor Irving Fisher's computations for 1909 make the aggregate imports and exports of the United States "a paltry 3 billions as compared with a total national trade of 387 billions.'"' Rough as are certain elements in this estimate, no plausible changes in the figures could make the foreign trade equal 2 per cent of the domestic trade. For the other three countries we have no corresponding data; but the relative proportion of foreign to total trade is certainly considerably larger in Great Britain and Germany than in the United States, and probably somewhat larger in France. In none of these countries, however, can the foreign trade make 5 per cent of the domestic trade. For example, if British imports and exports were fully double, and if British domestic trade were only half the American, still, on the basis of Fischer's estimate, the foreign commerce of Great Britain would not equal 4 per cent of her total business. Accordingly, the statistics of foreign trade which have been presented are imBortant for present purposes, less because of the magnitude of foreign trade itself than because changes in the volume of imports and exports reflect changes in the volume of domestic business at home and abroad. The figures of chief value in this respect have been shown to be, not the grand totals, but the data concerning the imports and exports of raw materials and manufactured goods. 15 The Purchasing Power of Money (New York, 1911), p. 306. 264 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA VI. The Volume of G-oods Consumed The many efforts made to account for crises as a result of under-consumption lend interest to the estimates of per capita consumption of staple commodities. But unfortunately the statistics concerning this subject provided by official bureaus are not very useful. The chief difficulty is that the figures do not really show the quantity of goods consumed, but the supply made available for consumption. The tacit assumption that a nation does use up within each year substantially the quantity of wheat and corn, tea and coffee, provided by its farmers and merchants is of exceedingly doubtful validity. For example, "if the American statistics may be trusted, there was a notable decline in consumption between the fiscal years 1897 and 1898. Table 64 shows that in the latter year the average inhabitant economized to the extent of 31 pounds of sugar, 10 ounces of tea, and 3 pounds of wool. The fact is that extraordinarily large quantities of these commodities TABLE 64 Pee Capita UONSUMPTION OF NiNE COMMODITIES IN THE United States By Years, 1890-1909 Actual amounts Years ending June 30 Wlieat and wheat flour Bushels Corn and corn meal Bushels Sugar Pounds Coffee Pounds Tea Pounds Distilled spirits Pf. gallons Malt liquors Gallons Wines Gallons Raw wool Pounds 1890 6.09 32.09 51.00 7.83 1.33 1.40 13.67 .46 6.03 1891 4.59 22.84 60.70 8.00 1.29 1.43 14.84 .46 6.44 1892 5.94 30.48 60.22 9.67 1.38 1.49 15.24 .43 6.75 1893 4.89 23.83 64.24 8.31 1.32 1.52 16.19 .48 7.10 1894 3.44 22.96 72.99 8.30 1.36 1.34 15.32 .32 5.13 1895 4.59 17.18 62.69 9.33 1.40 1.14 15.13 .30 7.39 1896 4.85 29.18 63.98 8.11 1.33 1.01 15.85 .27 6.98 1897 3.95 29.40 78.20 10.12 1.58 1.02 14.94 .53 8.40 1898 4.29 23.19 47.55 11.68 .93 1.12 15.96 .28 5.44 1899 6.09 23.51 61.98 10.79 .98 1.18 15.30 .35 4.51 1900 4.74 24.44 58.68 9.81 1.09 1.28 16.02 .39 5.72 1901 3.95 24.77 71.92 10.48 1.14 1.33 16.22 .37 5.18 1902 6.50 18.92 63.53 13.42 .94 1.36 17.50 .63 6.07 1903 5.81 30.45 79.38 10.91 1.30 1.46 18.04 .48 5.74 1904 6.33 26.74 69.26 11.79 1.34 1.48 18.34 .53 5.66 1905 6.15 28.59 72.47 12.17 1.23 1.45 18.50 .42 6.52 1906 7.07 30.73 77.07 9.94 1.10 1.52 20.19 .55 5.88 1907 6.86 33.11 82.61 11.40 .99 1.63 21.24 .67 5.81 1908 5.41 29.11 75.61 10.07 1.07 1.44 20.98 .60 4.95 1909 6.22 29.71 82.24 11.74 1.29 1.37 19.79 .70 6.67 Averages 1890-99 4.872 25.466 62.355 9.214 1.29 1.265 15.244 .388 6.417 1900-09 5.904 27.657 73.277 11.173 1.149 1.432 18.682 .534 5.820 Compiled from the Statistical Abstract of the United States, 1909. MITCHELL: BUSINESS CYCLES 265 TABLE 6^— (Concluded) Per Capita Consumption op Nine Commodities in the United States By Yeaes, 1890-1909 • Relative amounts Average actual amounts 1890-99 = 100 ending Wheat and June 80 wheat flour Corn and corn meal Sugar Coffee Tea Distilled spirits Malt liquors Wines Eaw wool 1890 125 126 82 85 103 111 90 119 94 1891 94 90 97 87 100 113 97 119 100 1892 122 120 97 105 107 118 100 111 105 1893 100 94 103 90 102 120 106 124 111 1894 71 90 117 90 105 106 100 82 80 1895 94 67 101 101 109 90 99 77 115 1896 100 115 103 88 103 80 104 70 109 1897 81 115 125 110 122 81 98 137 131 1898 88 91 76 127 72 89 105 72 85 1899 125 92 99 117 76 93 100 90 70 1900 97 96 94 106 85 101 105 101 89 1901 81 97 115 114 88 105 106 95 81 1902 133 74 102 146 73 108 115 162 95 1903 119 120 127 118 101 115 118 124 89 1904 130 105 111 128 104 117 120 137 88 1905 126 112 116 132 95 115 121 108 102 1906 145 121 124 108 85 120 132 142 92 1907 141 130 132 124 77 129 139 173 91 1908 111 114 121 109 83 114 138 155 77 1909 128 117 132 127 100 108 130 180 104 Averages 1890-99 100 100 100 100 100 100 100 100 100 1900-09 121 109 117 121 89 113 122 138 91 were rushed to American ports in the fiscal year 1897 and early in 1898, in order to avoid the increased duties about to be levied under the Dingley tariff. Later, these large stocks, piled up in warehouses, made it possible to supply the market for many months without new importations. There is no ground for thinking that consumption was so large as the fresh supplies provided in 1897, or so small as the fresh supplies provided in 1898. The American figures for wheat and corn are made by deducting the net exports from the standard crop, and dividing the remainder by the number of the population." No account is taken of the stock on hand at the beginning of the year, or of the stock carried over for use in the year following. Thus, the infiuence of commerce in moderating the irregularity of current production, by collecting stocks in seasons of abundance and distributing the store in seasons 16 See the Statistical Abstract, 1909, pp. 585, 586. 266 MEMOIRS OP THE UNIVERSITY OP CALIFORNIA TABLE 65 Peb Capita Consumption or Six Commodities in the United Kingdom Actual amounts Relative amounts Average actual amounts in 1890-99 = 100 Coffiee Pounds Tea Pounds Wine Gallons Spirits prf. Gallons Beer Gallons Tobacco Pounds Year : Coffee Tea Wine Spirits Beer Tobacco 1890 0.75 5.17 0.40 1.02 30.00 1.55 106 93 103 100 98 92 1891 0.76 5.35 0.39 1.04 30.16 1.61 107 96 101 102 99 95 1892 0.74 5.43 0.38 1.03 29.75 1.64 105 97 98 101 98 97 1893 0.69 5.40 0.37 0.98 29.55 1.62 97 97 96 96 97 96 1894 0.68 5.51 0.35 0.97 29.41 1.66 96 99 90 95 96 98 1895 0.70 5.65 0.37 1.00 29.58 1.66 99 101 96 98 97 98 1896 0.69 5.75 0.40 1.01 30.79 1.72 97 103 103 99 101 102 1897 0.68 5.79 0.39 1.02 31.29 1.75 96 104 101 100 103 103 1898 0.68 5.83 0.41 1.03 31.76 1.82 96 104 106 101 104 108 1899 0.71 5.95 0.41 1.09 32.53 1.88 100 107 106 107 107 111 1900 0.71 6.07 0.38 1.12 31.56 1.95 100 io9 98 110 104 115 1901 0.76 6.16 0.37 1.09 30.77 1.89 107 110 96 107 101 112 1902 0.68 6.06 0.36 1.05 30.24 1.92 96 109 93 103 99 114 1903 0.71 6.03 0.33 0.99 29.69 1.93 100 108 85 97 97 114 1904 0.67 5.99 0.28 0.95 28.79 1.95 95 107 72 93 94 115 1905 0.67 5.99 0.28 0.91 27.70 1.96 95 107 72 89 91 116 1906 0.66 6.17 0.28 0.90 27.97 1.97 93 111 72 88 92 116 1907 0.66 6.21 0.28 0.91 27.58 2.03 93 111 72 89 90 120 1908 0.66 6.18 0.25 0.85 26.62 2.02 93 111 65 83 87 119 1909 0.66 6.30 0.25 0.69 25.83 1.95 93 113 65 68 85 115 Average! i 1890-99 0.708 5.583 0.387 1.019 30.482 1.691 100 100 100 100 100 100 1900-09 0.684 6.116 0.306 .946 28.675 1.957 97 110 79 93 94 116 ata from the Statistical Abstract of the United Kingdom. of scarcity, is neglected. Similarly, the figures for wine have little value except as showing the fluctuating yields from season to season, and as indicating a growing taste for this beverage.^^ Indeed, the only American estimates of consumption of value to the student of business cycles are the figures for spirituous liquors and beer. The impo- sition of stamp taxes enables the Commissioner of Internal Revenue to deter- mine with substantial accuracy the quantity sold each season.'* Even these figures are made rather irregular by changes in the rates of taxation and in the prohibition laws. Further, the considerable factor of growth blurs the effect of business cycles. Nevertheless both series, as given in Table 64, show a rough correlation with business conditions, falling or rising slowly in hard times, rising more rapidly in good times. 597. IT The domestic production of wine, minus exports, is nowadays six times the volume of imports. Hid., p. 18 Hid., p. 597, note 2. MITCHELL: BUSINESS CYCLES 267 TABLE 66 Per Capita Consumption op Six Commodities in France Actual amounts Average actual amounts in 1890-99 = Relative amounts 100 Sugar Pounds 26.24 Coffee Pounds 3.90 Cocoa Pounds 0.81 Wine Gallons 24.82 Spirits Gallons 1.15 Beer^ Gallons 5.81 Year 1890 Sugar 104 Coffee 93 Cocoa 92 Wine 85 Spirits 100 Beer 93 1891 26.02 4.03 0.83 27.98 1.15 5.81 103 96 94 96 100 93 1892 27.12 4.13 0.84 25.61 1.20 6.34 108 98 95 88 105 102 1893 24.26 3.96 0.82 37.75 1.14 6.34 96 94 93 130 99 102 1894 26.02 4.01 0.85 29.04 1.07 5.81 103 95 96 100 93 93 1895 26.68 4.15 0.87 21.91 1.07 6.07 106 99 99 75 93 97 1896 23.59 4.30 0.90 35.11 1.11 6.34 94 102 102 120 99 102 1897 22.93 4.42 0.92 25.87 1.13 6.34 91 105 104 89 99 102 1898 24.26 4.52 0.99 26.40 1.24 6.60 96 107 112 91 108 106 1899 24.92 4.64 1.00 36.96 1.21 6.86 99 110 113 127 105 110 1900 25.80 4.67 0.99 47.52 1.23 7.13 102 111 112 163 107 114 1901 24.03 4.89 1.04 40.39 0.93 9.77 95 116 118 139 81 157 1902 26.02 4.99 1.10 28.51 0.86 9.77 103 119 125 98 75 157 1903 29.77 6.31 1.17 26.40 0.93 9.24 118 150 133 91 81 148 1904 33.30 4.30 1.22 48.05 1.03 9.77 132 102 138 165 90 157 1905 29.99 5.12 1.22 40.13 0.94 8.98 119 122 138 138 82 144 1906 32.63 5.49 1.31 37.49 0.94 9.77 129 131 148 129 82 157 1907 32.85 5.71 1.30 46.46 0.87 9.50 130 136 147 159 76 152 1908 33.52 5.77 1.14 43.82 0.91 10.03 133 137 129 150 79 161 1909 34.62 6.02 1.30 39.34 0.91 10.03 137 143 147 135 79 161 Averages 1890-99 25.204 4.206 0.8'83 29.145 1.147 6.232 100 100 100 100 100 100 1900-09 30.253 5.327 1.179 39.811 0.955 9.399 120 127 134 137 83 151 Data from the Annuaire statistigue de France. The British statistics in Table 65 are more regular and more significant than the American. But again, changing habits of consumption mask part of the influence of business conditions. Since 1890 the British have been using more tea and less coffee, while the opposite is true of Americans. Further, the British consumption of wine, spirits, and beer has declined, while the American consumption has risen. There are indications, however, that business pros- perity tends to check a decline and to stimulate a growth in consumption, while business depression has the opposite tendencies. Finally, the French figures (Table 66) are almost as irregular as the Amer- ican. Sugar and wine refiect the fortunes of French agriculture ; coffee shows an extraordinary jump in 1903 and decline in 1904 ; beer appears to be affected by the abundance or scarcity of wine and has a very high factor of growth which may well result from the diminishing use of spirits ; filially, cocoa, like beer, seems to be used partly as a substitute for wine, but nevertheless shows a rough correlation with business cycles. 268 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA VII. Unemployment Another aspect of the volume of business is shown by the statistics of unemployment. Unfortunately, systematic information upon this subject is exceedingly meagre in the United States. The Geological Survey reports annually the average number of days in which the bituminous and anthracite coal mines are operated; but we have data covering no other industry in each year since 1890.''' Of these two series, that for bituminous mines is the more significant, because less affected by serious strikes. The figures reflect the decline of business activity after the panic of 1893, the brief revival of 1895, the sustained revival after 1896, the depression of 1903-04, the fresh revival of 1905-07, and the depression of 1908. TABLE 67 Average Number op Days in Which the Coal Mines of the United States Were Operated By Years, 1890-1908 Relative number of days Actual number of Average actual number in days 1890-99 = 100 Anthracite Bituminous Anthracite Bituminous Year mines mines mines mines 1890 200 226 109 109 1891 203 223 111 108 1892 198 219 108 106 1893 197 204 107 99 1894 190 171 104 83 1895 196 194 107 94 1896 174 192 95 93 1897 150 196 82 95 1898 152 211 83 102 1899 173 234 94 113 1900 166 234 91 113 1901 196 225 107 109 1902 116 230 63 111 1903 206 225 112 109 1904 200 202 109 98 1905 215 211 117 102 1906 195 213 106 103 1907 220 234 120 113 1908 200 193 109 93 Averages 1890-99 183.3 207.0 100 100 Compiled from the reports of the U. S. Geological Survey on Mineral Resources of the United States, 1908, Part II, p. 41. 18 See Scott Nearing, "The Extent of Unemployment in the United States," Quarterly PuTjlications of the American Statistical Association, September, 1909; vol. xi, pp. 525-542; "Statistics of Unemployment " Bulletin of the United States Bureau of Labor, No. 109, October 15, 1912. ' MITCHELL: BUSINESS CYCLES 269 CHART 4-2 Relative Number of Days in Which the Coal Mines of the: United States were OFtRATED. IS90 -1908. 120 110 100 90 — — — — — Bituminous Mines. 120 110 100 90 .^ V / / — — \ X l"' ' ^ N / \ \ \ X / / \ \" / 1 \ / \ • \ \ \ \ \ I / / / \ 1 80 70 \ / no 70 185 '9 '95 ! '9 > '3 ^ '9. f '9 ; '9- '91 i '9' 3 I9t )0 'o '02 "O i '0^ 1- 'Of > 'ot ; '07 '08 '0£ ) 1910 In England the trade-unions which pay unemployed benefits report to the Labor Department the percentage of their members receiving such aid on the last day of each month.'" These reports have made possible the admirable British statistics of unemployment. While the returns are far from covering the whole field of industry, they are sufficiently inclusive in their scope "to make the movements of the general unemployed percentage over a period of years fairly representative of labour conditions as a whole.'"' Table 68 shows this general percentage, the percentages for several trades separately, and the official index numbers of employment. For convenience of comparison, the corresponding series showing the percentage of members out of work among the reporting French unions is inserted in the same table. The British series indicates that work was plentiful in 1890. Thereafter times grew steadily worse for wage-earners until 1893-94, then better until 1899, worse again until 1904, better once more until 1906, worse until 1908, and finally better again in 1910-11. That is, the fluctuations of unemployment accord almost perfectly with reports of business conditions published by the 20 "Persons on strike or locked out, siek or superannuated, are excluded from the figures." Btract of Labour Statistics of the United Kingdom, 1906-07, p. 3, note. 21 W. H. Beveridge, Unemployment (London, 1909), pp. 22, 23. Twelfth Ab- 270 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Economist. The maximum swing from tlie best to the worst years is 5.5 per cent of the membership of the reporting unions in 1890-99 and 5.3 per cent of the membership in 1900-09. The French figures run upon a higher level than the British ; but that fact possesses little significance because of differences in the trades represented. The series does not begin until recovery from the depression of the early nineties was under way. A fairly stable level of employment is indicated until 1900. But the crisis of that year was followed by hard times and involuntary idleness increased among workingmen until 1904. The tide turned in 1905; 1906 and 1907 were busy years, and even the depression of 1908 was less severe than that of 1902-04 if this gauge may be trusted.^^ TABLE 68 Statistics of Unemployment in the United Bjngdom and France United Kingdom France Index Percentages unemployed in certain industries r ^ -^ number of ^ -^ ^ Percentage employment All unions All other unemployed Average included Engineering, Woodworking Printing trades among of 1890- in the shipbuilding, and and included in members of Year 99 = 100 returns and metal Building furnishing bookbinding the returns trade unions 1890 102 2.1 2.2 2.2 2.5 2.2 1.6 1891 101 3.5 4.1 1.9 2.1 4.0 1.7 1892 98 6.3 7.7 3.1 3.8 4.3 5.6 1893 97 7.5 11.4 3.1 4.1 4.1 2.6 1894 97 6.9 11.2 4.3 4.4 5.7 1.9 1895 98 5.8 8.2 4.4 3.6 4.9 3.3 7.0 1896 101 3.3 4.2 1.3 2.0 4.3 2.3 6.7 1897 101 3.3 4.8 1.2 2.2 3.9 1.8 6.9 1898 102 2.8 4.0 0.9 2.3 3.7 1.5 7.3 1899 102 2.0 2.4 1.2 2.1 3.9 1.2 6.6 1900 102 2.5 2.6 2.6 2.8 4.2 1.6 6.8 1901 101 3.3 3.8 3.9 3.7 4.5 2.1 7.8 1902 100 4.0 5.5 4.0 4.1 ' 4.6 1.9 9.9 1903 99 4.7 6.6 4.4 4.7 4.4 2.5 9.4 1904 98 6.0 8.4 7.3 6.8 4.7 3.0 10.2 1905 99 5.0 6.6 8.0 5.8 5.1 2.3 9.0 1906 101 3.6 4.1 6.9 4.8 4.5 1.9 7.6 1907 101 3.7 4.9 7.3 4.6 4.3 1.6 7.0 1908 96 7.8 12.5 11.6 8.3 5.5 2.9 8.6 1909 96 7.7 13.0 11.7 7.6 5.6 2.6 7.3 1910 99 4.7 6.8 8.3 5.4 4.9 2.2 5.8 1911 101 3.0 3.4 4.2 3.3 5.1 2.1 4.7 Averages 1890-99 100 4.35 6.02 2.36 2.91 4.10 2.35 1900-09 99 4.83 6.80 6.77 5.32 4.74 2.24 8.36 Data from the Fourteenth Abstract of Labor Statistics of the United Kingdom, 1908-09, pp. 2 and 6- Annwaire statistioue de France, 1908, p. 178*. - • i 22 The German figures showing the percentage of unemployment cover too short a time to possess much significance as yet. MITCHELL: BUSINESS CYCLES 271 no 100 1 90 CHART 45. Index Numbers of Employment in the United Kingdom, average of i&90-i899 100. 110 100 90 [^ .,**• \. ■^ ■^ '~~ -if^'^ \ y 1890 '91 *92 '93 '94 '95 '9S '97 '98 '99 1900 'Ol '02 '03 '04 '05 '06 '01 '08 '09 1910 Among the American figures patterned after the British statistics of unem- ployment, the following series published by the New York State Department of Labor Statistics is perhaps the best. It shows the average percentage of members reported out of work by upwards of 200 trade unions. 1902 14.8% 1903 17.5 1904 16.9 1905 11.2 1906 9.3 1907 .- 16.2% 1908 29.7 1909 18.5 1910 19.1 1911 21.1 The exceedingly high level upon which these figures fluctuate concerns us less than the violence of the changes from good years to poor. The depression of 1903-04, the prosperous times of 1905-06, the panic of 1907, the depression of 1908, the brief revival of 1909, and the return of depression in 1910-11 are all reflected in this series. But the most striking fact is that the maximum percentage of unemployment is more than three times the minimum. VIll. Pee Capita Indices of the Volume of Business The volume of business important for the study of business cycles is usually the total volume as measured in physical or pecuniary units. But sometimes it is desirable to know the changes in this volume as compared with the changes in population. To serve such purposes, several of the most significant indices shown in the preceding tables have been reduced to a per capita basis. 272 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA The results, presented in the next table, throw the effects of prosperity and depression into higher relief, because they reduce, though without wholly eliminating, the obscuring factor of growth. Per capita figures also make possible fairer comparisons between the provision made in different countries for the material welfare of each citizen. Especial interest attaches to the relative figures. They show that the rate of progress has been fastest in the United States and next fastest in Germany, except in reference to foreign commerce, where the rank of these two leaders is reversed. More surprising is the conclusion that in most of the lines investigated France has progressed more rapidly than the United Kingdom. TABLE 69 Indices or the Volume of Business in the United States, United Kingdom, France, and Germany, Reduced to a Per Capita Basis By Years, 1890-1910 Tons of coal produced per capita Tons of pig-iron produced per capita Value of pig-iron produced in dollars per capita Year United States United Kingdom France Germany United States United Kingdom France Germany United States United Kingdom France Germany 1890 2.24 4.85 .677 1.79 .46 .211 .049 .093 2.40 3.12 .703 1.30 1891 2.37 4.89 .677 1.87 .130 .196 .049 .092 2.01 2.51 .625 1.10 1892 2.46 4.78 .677 1.81 .141 .176 .052 .097 2.01 ' 2.20 .625 1.09 1893 2.46 4.26 .651 1.85 .107 .182 .052 .096 1.28 2.00 .599 1.00 1894 2.25 4.83 .703 1.89 .099 .190 .052 .103 0.96 2.13 .599 1.07 1895 2.50 4.85 .727 1.96 .136 .196 .052 .104 1.52 2.30 .545 1.08 1896 2.43 4.92 .753 2.10 .122 .220 .060 .119 1.28 2.55 .675 1.34 1897 2.50 5.05 .777 2.22 .135 .220 .062 .127 1.33 2.58 .725 1.55 1898 2.69 5.00 .825 2.32 .162 .213 .064 .132 1.61 2.72 .799 1.65 1899 3.06 5.39 .823 2.43 .183 .230 .064 .145 3.30 3.90 .925 1.96 1900 3.16 5.46 .848 2.63 .181 .218 .069 .150 3.41 4.44 1.105 2.34 1901 3.38 5.26 .821 2.65 .205 .190 .062 .137 3.12 2.91 .846 2.06 1902 3.40 5.40 .767 2.56 .225 .207 .061 .145 4.71 3.26 .793 1.87 1903 3.95 5.45 .870 2.73 .223 .211 .072 .169 4.26 3.25 .895 2.13 1904 3.81 5.45 .867 2.81 .200 .204 .074 .166 2.82 2.91 .944 2.08 1905 4.17 5.49 .893 2.84 .273 .223 .077 .177 4.54 3.42 1.046 2.29 1906 4.32 5.78 .865 3.10 .295 .233 .084 .198 5.90 3.96 1.298 2.78 1907 4.91 6.13 .916 3.27 .296 .231 .089 .205 6.07 4.17 1.043 3.16 1908 4.17 5.94 .939* 3.37 .179 .206 .086* .184 2.86 3.17 1.370* 2.70 1909 4.54 5.93 .939* 3.36 .285 .213 .089* .195 4.62 3.37 1.446* 2.59 1910 4.86 5.88 .962* 3.39 .296 .223 .101* .226 4.61 3.72 2.96 Averages 1890-99 2.496 4.882 .7290 2.024 .1361 .2034 .0556 .1108 1.770 2.601 .682 1.314 1900-09 3.981 5.629 .8725 2.932 .2362 .2136 .0763 .1726 4.231 3.486 1.0786 2.400 * Provisional figures, subject to revision. Computed from data in the preceding tables of this chapter, except that the population of the United Kingdom (instead of the figures for England and Wales given in Table 47) is used as the divisor of amounts which relate to that area. MITCHELL: BUSINESS CYCLES 273 TABLE 69— {Continued) Ind ICES OF THE Volume of Business IN THE United I States, United Kingdom, France, and Germany, Eeduced to a Feb Capita Basis Bushels of wheat produced per capita Railway gross earnings in per capita A dollars Bank clearings in dollars per capita U.S. outside England New York London Bills of exchange in dollars per capita France Germany Year United States United Kingdom France Germany United States United Kingdom France Germany 1890 6.34 2.08 8.05 2.11 16.7 9.9 5.81 6.30 367 1,319 141 68.1 1891 9.59 2.04 5.70 1.73 17.2 10.1 5.96 6.43 359 1,144 143 70.3 1892 7.93 1.65 8.10 2.31 18.0 10.0 5.94 6.38 389 1,071 136 67.4 1893 5.97 1.35 7.24 2.17 18.4 9.7 6.07 6.59 345 1,057 137 68.9 1894 6.81 1.62 9.06 2.16 15.9 10.0 6.20 6.55 312 1,023 133 68.0 1895 6.78 .99 8.83 2.25 15.6 10.1 6.34 6.87 338 1,213 134 71.9 1896 6.09 1.52 8.83 2.39 16.4 10.5 6.49 7.16 319 1,198 140 74.6 1897 7.40 1.45 6.40 2.24 17.1 10.7 6.68 7.44 332 1,170 144 79.5 1898 9.26 1.91 9.36 2.45 17.1 11.0 6.88 8.05 369 1,251 151 86.6 1899 7.36 1.69 9.36 2.55 17.7 11.4 7.07 8.39 448 1,395 157 93.5 1900 6.84 1.36 8.38 2.52 19.5 11.7 7.53 8.62 438 1,354 160 99.6 1901 9.64 1.35 7.98 1.62 20.5 11.7 7.21 8.26 503 1,426 153 93.5 1902 8.46 1.43 8.39 2.47 21.8 11.8 7.29 8.34 527 1,479 152 89.4 1903 7.90 1.18 9.31 2.24 23.5 11.9 7.42 8.79 535 1,477 160 91.5 1904 6.69 .92 7.63 2.35 23.9 11.9 7.45 9.08 532 1,530 165 94.3 1905 8.24 1.44 8.55 2.26 24.8 11.9 7.76 9.62 595 1,759 170 104.3 1906 8.58 1.43 8.27 2.37 27.1 12.1 8.09 10.23 644 1,804 187 110.4 1907 7.26 1.33 9.59 2.06 29.7 12.5 8.35 10.53 662 1,787 196 119.8 1908 7.48 1.27 8.07* 2.19 26.9 12.2 8.50* 10.21 597 1,681 191* 111.8 1909 8.14 1.46 9.04* 2.17 26.7 12.1 8.63* 10.63 687 1,859 197* 124.6 1910 6.89 1.29 6.53* 2.20 29.8 12.4 11.19 724 1,991 214* 124.3 1911 6.62 1.46 7.97* 2.28 721 1,964 128.1 Averages 1890-99 7.353 1.630 8.093 2.236 17.01 10.34 6.344 7.016 357.8 1,184.1 141.6 74.88 1900- 09 7.923 1.317 8.521 2.225 24.44 11.98 7,823 9.431 572.0 1,615.6 173.1 103.92 * Provisional figures, subject to revision. 274 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 69— (Continued) Indices of the Volume of Business in the United States, United Kingdom, France, and Germany, Eeduoed to a Per Capita Basis Imports of merchandise in millions of dollars Exports of merchandise in millions of dollars Year 1890 United States 13.1 United Kingdom 46.2 France 22.3 Germany 20.1 United States 13.6 United Kingdom 34.2 France 18.9 Germany 16.1 1891 13.0 48.1 24.0 19.8 15.2 31.8 17.9 15.2 1892 12.9 45.9 21.0 19.0 14.4 29.0 17.4 14.0 1893 11.7 43.7 19.4 18.6 13.2 27.6 16.3 14.5 1894 10.0 43.9 19.3 18.3 12.2 27.0 15.5 13.7 1895 11.6 44.3 18.6 18.9 12.0 28.1 16.9 15.2 1896 9.7 47.4 19.0 19.4 14.3 29.5 17.0 15.9 1897 10.4 47.6 19.8 20.8 15.4 28.5 18.0 16.1 1898 8.7 49.4 22.2 22.2 17.2 28.1 17.5 16.4 1899 10.8 50.1 22.4 23.6 17.2 31.5 20.6 18.1 1900 10.9 54.3 23.3 24.5 19.4 34.4 20.4 19.6 1901 11.3 53.1 21.6 22.7 18.9 32.8 19.8 18.5 1902 12.2 53.6 21.7 23.2 17.2 32.8 21.0 19.3 1903 12.3 54.6 23.7 24.4 18.4 33.5 21.0 20.4 1904 12.6 54.9 22.2 25.4 17.6 34.3 21.9 20.9 1905 14.0 55.2 23.5 28.1 19.3 • 37.3 24.0 22.6 1906 15.4 58.6 27.6 31.2 21.0 42.1 25.9 24.7 1907 16.3 61.7 30.6 33.6 22.0 47.4 27.5 26.3 1908 12.6 56.6 27.6* 29.0- 19.7 41.6 24.7* 24.2 1909 16.3 58.3 30.6* 31.8 18.8 41.4 28.0* 24.6 1910 17.0 62.3 35.0* 32.9 19.8 46.6 30.5* 27.5 1911 16.3 62.1 39.9* 3,5.3 21.9 48.8 30.2* 29.5 Averages 1890-99 11.19 46.66 20.80 20.07 14.47 29.53 17.60 15.52 1900-09 13.39 56.09 25.24 27.39 19.23 37.76 23.42 22.11 Provisional figures, subject to revision. MITCHELL: BUSINESS CYCLES 275 TABLE 69— (Continued) Indices of the Volume of Business in the United States, United Kingdom, France, and Germany, Reduced to a Pek Capita Basis Eelative figures. Average actual figures 1890-99 = 100 Year 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 Tons of coal produced per capita United United States Kingdom France Germany 90 99 93 98 95 99 99 90 100 97 100 108 123 127 135 136 158 153 167 173 197 167 182 195 100 98 87 99 99 101 103 102 110 112 108 111 112 112 112 118 126 122 121 120 93 93 89 96 100 103 107 113 113 116 113 105 119 119 122 119 126 129* 129* 132* 92 89 91 93 97 104 110 115 120 130 131 126 135 139 140 153 162 166 166 167 Tons of pig-iron produced per capita United United States Kingdom France Germany 107 104 88 84 Value of pig-iron produced per capita 96 104 79 73 100 90 99 119 134 133 151 165 164 147 201 217 217 132 209 217 96 87 89 93 96 108 108 105 113 107 93 102 104 100 110 115 114 101 105 110 94 94 94 94 108 112 115 115 124 112 110 129 133 138 151 160 155* 160* 182* 83 88 87 93 94 107 115 119 131 135 124 131 153 150 160 179 185 166 176 204 United States 136 114 114 72 54 86 72 75 91 186 193 176 266 241 159 256 333 343 162 261 260 United Kingdom 120 97 85 77 82 98 99 105 150 171 112 125 125 112 131 152 160 122 130 143 France Germany 130 99 92 92 88 88 80 99 106 117 136 162 124 116 131 138 153 190 153 201* 212* 84 83 76 81 82 102 118 126 149 178 157 142 162 158 174 212 240 205 197 225 Averages 1890-99 100 100 100 100 1900-09 159 115 120 145 * Provisional figures, subject to revision. 100 174 100 105 100 137 100 156 100 239 100 134 100 158 100 183 276 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 69— (Continued) Indices of the Volume or Business in the United States, United Kingdom, France, and Germany, Reduced to a Per Capita Basis Relative figures. Average actual figures 1890-99 = 100 Bushels of wheat produced per capita Railway gross earnings per capita Bank per clearings capita Bills of exchange per capita Year United States United Kingdom France Germany United States United Kingdom France Germany U. S. out- England side N. Y. London France Germany 1890 86 138 99 94 98 96 92 90 103 111 100 91 1891 130 125 70 77 101 98 94 92 100 97 101 94 1892 108 101 100 103 106 97 94 91 109 90 96 90 1893 81 83 89 97 108 94 96 94 96 89 97 92 1894 93 99 112 97 93 97 98 93 87 86 94 91 1895 92 61 109 101 92 98 100 98 94 102 95 96 1896 83 93 109 107 96 102 102 102 89 101 99 100 1897 101 89 79 100 101 103 105 106 93 99 102 106 1898 126 117 116 110 101 106 108 115 103 106 107 116 1899 100 104 116 114 104 110 111 120 125 118 111 125 1900 93 83 104 113 115 113 119 123 122 114 113 133 1901 131 83 99 72 121 113 114 118 141 120 108 125 1902 115 88 104 110 128 114 115 119 147 125 107 119 1903 107 72 115 100 138 115 117 125 150 125 113 122 1904 91 56 94 105 141 115 117 129 149 129 117 126 1905 112 88 106 101 146 115 122 137 166 149 120 139 1906 117 88 102 106 159 117 128 146 180 152 132 147 1907 99 82 118 92 175 121 132 150 185 151 138 160 1908 102 78 100* 98 158 118 134* 146 167 142 135* 149 1909 111 90 112* 97 157 117 136* 152 192 157 139* 166 1910 94 79 81* 98 175 120 159 202 168 151* 166 1911 90 90 98* 102 201 166 171 Averages 1890-99 100 100 100 100 100 100 100 100 100 100 100 100 1900-09 108 81 105 99 144 116 123 134 160 136 122 139 ' Provisional figures, subject to revision. MITCHELL: BUSINESS CYCLES 277 TABLE 69— (Concluded) Indices of the Volume op Business in the United States, United Kingdom, Prance, and Germany, Eeduced to a Per Capita Basis Relative figures. Average actual figures 1890-99 = 100 Imports of merchandise per capita Exports of merchandise per capita Tear United States United Kingdom France Germany 'united States United Kingdom France Germany 1890 117 99 107 100 94 116 107 104 1891 116 103 115 99 105 108 102 98 1892 115 98 101 95 100 98 99 90 1893 105 94 93 93 91 93 93 93 1894 89 94 93 91 84 91 88 88 1895 104 95 89 94 83 95 96 98 1896 87 102 91 97 99 100 97 102 1897 93 102 95 104 106 97 102 104 1898 78 106 107 111 119 95 99 106 1899 97 107 108 118 119 107 117 117 1900 97 116 112 122 134 116 116 126 1901 101 114 104 113 131 111 112 119 1902 109 115 104 116 119 111 119 124 1903 110 117 114 122 127 113 119 131 1904 113 118 107 127 122 116 124 135 1905 125 118 113 140 133 126 136 146 1906 138 126 133 155 145 143 147 159 1907 146 132 147 167 152 161 156 169 1908 113 121 133* 144 136 141 140* 156 1909 146 125 147* 158 130 140 159* 158 1910 152 134 168* 164 137 158 173* 177 1911 146 133 192* 176 151 165 172* 190 Averages 1890-99 100 100 100 100 100 100 100 100 1900-09 120 120 121 136 133 128 133 143 * Provisional figures, subject to revision. CHAPTER VI THE CURRENCY I. The Production of Gold Grold mining is one of the branches of production in which the output is but slightly affected by business cycles. It has often been pointed out that prosperity tends to check the production of gold by increasing the operating expenses of mines. Of course the gold miner has not the recourse open to most business men of raising the price of his product. Hence mines which pay but a small profit in years of depression may be closed in years of prosperity. What is more important, the low-grade ore in profitable mines may be extracted or not according as operating expenses fall or rise. But it is not often noted that capit5,l for exploiting gold mines, improving transportation in mining districts, and the like, can be raised more readily when investors are in an optimistic frame of mind than when they are rendered conservative by hard times. Which of these factors is the more weighty is neither easy nor important to determine. For the factors of decisive weight in changing the annual pro- duction in the period under discussion belong to a different order — the discovery of new deposits of gold, improvements in the arts of mining and metallurgy, and the maintenance of peace in the chief producing districts. How large a part the latter factors have had in causing the marked increase in gold production since 1890 may be inferred from the following table. The development of the South African mines, discovered in the eighties, has con- tributed the lion's share of the increase. But the low-grade African ores could not have been worked at a profit by the methods in use a generation before. A similar combination of discoveries and advance in technique made in other quarters of the globe accounts for the remaining increase. On the other hand, the marked decline of production in 1900 was due to the Boer War. Rapid as the increase has been, the rate of increase has fallen off in a notable degree since the later nineties. This fact is brought out by the last column of the table, which shows the annual gain or loss in the form of a percentage of the preceding year's output. The average of these percentages in the second decade is less than half the average of the first decade. [278] MITCHELL: BUSINESS CYCLES 279 TABLE 70 The Production op Gold by Years, 1890-1911 Annual production of gold Actual amounts Millions of dollars Relative amounts Average actual amounts in 1890-99 = 100 A Per cent of increase ( + ) or decrease ( — ) in comparison with preceding year — 3.8% Year 1890 World 119 Africa 11 ' World Africa^ 61 26 1891 131 16 67 38 + 9.9 1892 147 24 75 57 +12.2 1893 157 29 80 69 + 7.4 1894 181 40 92 95 +15.0 1895 199 45 101 107 + 9.7 1896 202 " 45 103 107 + 1.8 1897 236 59 120 140 +16.7 1898 287 80 146 190 +21.5 1899 307 73 156 173 + 6.9 1900 255 9 130 21 —17.0 1901 261 9 133 21 + 2.5 1902 297 39 151 92 +13.7 1903 328 68 167 161 +10.4 1904 347 86 176 204 + 6.0 1905 380 113 193 268 + 9.5 1906 403 135 205 320 + 5.8 1907 413 152 , 210 360 + 2.5 1908 443 167 225 396 + 7.3 1909 454 171 231 405 + 2.5 1910 455 175 231 415 + .2 1911 462 194 235 460 + 1.5 Averages 1890-99 196.6 42.2 100 100 + 9.7 1900-09 358.1 94.9 182 225 + 4.3 Data compiled from the Reports of the Director of the Mint upon the Production of the Precious Metals. II. The Quantity of Gtold Currency How much of this new gold has gone into monetary use, and remained there, is not definitely known. Scrupulously accurate records are kept of the quantity of gold coined, but they do not solve the problem, (1) because large sums of uncoined gold serve monetary uses in the reserves of governments and banks, (2) because considerable sums of gold coin are annually melted down by gold- smiths, etc., and (3) because few mint reports distinguish between the new 280 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Chart 44. / 400 RELATIVE Production OF Gold j IN THE World and in fi tf'RICA. ' 1890 - 1909. I / In Africa. 1 1 320 280 1 1 1 240 , 240 200 1 L 1 1 y 200 160 ;/ ] ,r 7 160 / / 1 / 1 ' 1 1 ISO L 4_ _,L 120 // i 1 r i 1 1 80 -j-~—i 1 80 /' 1 -\ 40 / 1 / 1 — f— J 1 1 1 1 1 1 L 40 / 1 f 189031 '9J '33 '34 '35 'X '91 Si "99 Wb' )rO2'o3'O4'05'M'0T(18'l)SI3l0 MITCHELL: BUSINESS CYCLES 281 bullion and the old coin, old plate, etc., which they turn into money. Indeed, the tables compiled by the American mint make out that more gold has been coined in the world since 1890 than has been mined.' Another method of attacking the problem is to estimate the quantity of new gold which is consumed in the arts and drained away to the Orient. Since 1893 the Director of the United States Mint has undertaken to make annual estimates of "the world's industrial consumption of gold." His figures indi- cate that in 1893-1909 about one-quarter of the annual output of the mines has been used in the arts. If the absorption of gold by British India is added to the industrial consumption, the proportion of the output withdrawn from monetary use in the Occident is raised from one-quarter to rather more than one-third.^ These estimates, however, are admittedly based on inadequate returns, and are therefore subject to a wide margin of error. Another com- petent authority. Professor L. de Launay of the Ecole Superieure des Mines, has recently estimated the industrial consumption at 40 per cent of the output, oriental absorption at 16 per cent, and coinage at 44 per cent.' Whether the actual proportion of the new gold which has gone into monetary use in the west is nearer the mint's ratio of two-thirds or Launay 's ratio of two-fifths, 1 For 1890-1909 the figures are: aggregate production $5,547 millions, aggregate coinage $5,811. Beport on the Production of the Precious Metals in 1909, p. 36; Report of the Director of the Mint, 1910, p. 61. Of course, the discrepancy may be due in part to an underestimate of the gold production. For the grounds for sus- pecting such an error in the figures, see L. de Launay, The World's Gold, translated by O. C. Williams (London, 1908), pp. 161-168. 2 The Industrial Consumption and Indian Absorption of Gold Industrial consumption United —A ^ Other Ind lian Total Columns World's production Per cent of column 4 to Year States countries absorption 1, 2, and 3 of gold colnmn 5 1893 13 39 + 6 58 157 37% 1894 10 44 11 43 181 24 1895 12 48 -h 14 74 199 37 1896 11 50 + 14 75 202 37 1897 11 50 + 24 85 236 36 1898 13 54 -h 29 96 287 33 1899 17 58 + 39 114 307 37 1900 19 58 + 12 89 255 35 1901 20 62 + 16 98 261 38 1902 23 55 + 38 116 297 39 1903 24 55 + 43 123 328 38 1904 23 57 -t- 43 123 347 35 1905 28 57 + 13 98 380 26 1906 33 61 + 59 153 403 38 1907 34 66 + 69 168 413 41 1908 15 63 -1- 27 106 443 24 1909 30 82 + 90 202 454 44 1910 34 78 + 75 187 455 41 Sums 370 1,037 -1-600 2,008 5,705 of prod uction Q.5% 18.2% 10.5% 35.2% 100% Column 1 shows the amount of new bullion and gold coin consumed in the arts in the United States. In accordance with the Director of the Mint's revision of the gold-stock estimate, $2,000,000 a year has been added to the consumption in 1893-1902 to correct the original understatement of the gold coin melted by jew- elers. (See the Director's report for 1907, p. 86.) Column 2 has been compiled from the annual Beports on the Production of the Precious Metals. Column 3 shows the production of gold in British India, plus the net imports, or minus the net exports. The figures are for the fiscal years, beginning April 1. They are taken from an article by F. J. Atkinson, Acoountant-General of the United Provinces of India (Journal of the Royal Statistical Society, vol. 72, p. 563). The data for 1909 and 1910 have been computed from the Beport on the Production of the Precious Metals. 3 The World's Gold, p. 178. Launay does not publish the data upon which his estimate rests. 282 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA we do not know. We cannot even aver with certainty that the average ratio falls within these limits. The one fact of present interest which the mint's investigation does establish is that the industrial consumption of gold, like that of other luxuries, varies widel)^ between periods of prosperity and of depression. So far as this factor counts, it restricts the increase in the quantity of money when business is active and expands the increase when business is dull. The United States is the only one of our four countries in which the statistics of coinage and industrial consumption are used in framing an annual estimate of the quantity of gold money. Starting with his estimate for the close of the preceding year, the Director of the Mint adds the net increase in gold coined during the current year and the imports of Ajnerican coin. On the other hand, he deducts the estimated industrial consumption and the exports of coin. Of these items, none but the coinage can be accurately determined. Even the exports and imports must be guessed at in part ; for no one knows what sums of gold coin are taken out of and brought into the country by immigrants, emigrants, and travelers. Moreover, if the error in the estimates runs the same way year after year a mistake of a million will presently mount to tens of millions. Convinced by the criticisms of Muhleman and others that the official estimate was too high, the Director of the Mint made a thorough revision of the figures in 1907, and deducted a round $135,000,000 from the monetary stock of gold to correct errors which had been accumulating since 1873.* There is no satisfactory way of determining the margin of error to which even these revised figures are subject ; but they probably do show with approximate accu- racy the facts of most importance for this inquiry, namely, the change from one year to the next since 1890. According to the figures (Table 71), the monetary stock of gold declined $145 millions between the end of 1890 and 1895 — a period when business was depressed, the treasury in straits, and, most important of all, when the main- tenance of the gold standard seemed doubtful. After Mr. Bryan had been defeated, the treasury deficit had been wiped out, and business had improved, the gold losses were promptly made up — made up more than twice over by 1900. Thereafter the increase was steady but moderate until 1906 and 1907, when more than $300 millions were added to the stock. The dull year 1908 brought a small additional gain, and the more active year 1909 a still smaller loss. Thus the largest relative gains were scored by the gold stock in 1896-98 and again in 1906-07 — the first a season of increasing trade and reviving confi- dence in the monetary situation, the second a season when a great business boom culminated and ended in a panic. The chief sources from which arise the gains or losses of gold shown by Table 71 are set forth in the next table. According to these official estimates, * Report of the Director of the Mint, 1907, pp. 66-94. MITCHELL: BUSINESS CYCLES 283 in the long run the United States— though one of the leading gold producers of the world— absorbs a part of the metal produced elsewhere, in addition to the output of its own mines. But in short periods monetary legislation and business conditions frequently reverse this situation, not merely stopping the American absorption of foreign gold but even expelling a part of the current American product to foreign lands.' TABLE 71 Official Estimate of the Monetary Stock of Gold in the United States on December 31 of Each Year, 1890-1911 Monetary stock Increase ( + ) during or decrease ( — ) the year Year Actual amounts in millions of dollars Relative amts. Av. actual amounts in 1890-99 = 100 Actual amounts in millions of dollars In percentages of stock at end of preceding year 1890 648 101 + 15 +. 2.2% 1891 626 97 — 22 — 3.4 1892 582 90 — 44 — 7.0 1893 591 92 + 9 + 1.5 1894 539 84 — 52 — 8.8 1895 503 78 — 36 — 6.7 1896 589 91 + 86 +17.1 1897 638 99 + 49 + 8.3 1898 832 129 +194 +30.4 1899 897 139 + 65 + 7.8 1900 989 153 + 92 +10.3 1901 1,050 163 + 61 + 6.2 1902 1,121 174 + 71 + 6.8 1903 1,192 185 + 71 + 6.3 1904 1,217 189 + 25 + 2.1 1905 1,288 200 + 71 + 5.8 1906 1,458 226 +170 +13.2 1907 1,605 249 +147 +10.1 1908 1,654 257 + 49 + 3.1 1909 1,638 254 — 16 — 1.0 1910 1,709 265 + 71 + 4.3 1911 1,797 279 + 88 + 5.1 Averages 1890-99 644.5 100 + 26.4 + 4.1 1900-09 1,321.2 205 + 74.1 + 6.3 "corrected" f igures for 1890-1906 in the Report of the Director of the Mint, 1907, p. 87, and continued from the Report of the Treasurer of the United States, 1910, pp. 61-62. 5 The discrepancies shown by Table 72 between the net gain or loss of gold by mining, foreign trade, and industrial consumption, on the one hand, and on the other hand the net increase or decrease in the estimated monetary stock, are due chiefly to the carrying of coin out of or into the country by travelers, soldiers going to the Philippines, emigrants, and immigrants. Such exports and imports of gold escape record by the customs houses. A minor source of discrepancy is that each year over $1,000,000 of old jewelry, etc., passes over from industrial to monetary use. See Seport of the Director of the Mint, 1907, pp. 87-92. 284 MEMOIRS OP THE UNIVERSITY OP CALIPORNIA Chart 45. ♦ 280 Rfi ativf Amoi ikits nf thf MfiMFTARY 55tt"k / 260 240 2 20 200 180 160 140 OF Gold in the United 5tate5 ON December 31st of each year / / s / I&90 - 1910. i / 1 / 200 180 160 140 120 / y^ / / / / / / / / / 120 100 \ *^ 100 N s. i / ' 80 \ V / 80 > r 1890 91 32 93 '94 V k 91 98 99 1900 0| 02 03 '04 '05 '06'07 08 '09 1910 MITCHELL: BUSINESS CYCLES 285 TABLE 72 Chiep Sources or Gain or Loss to the Monetary Stock of Gold in the United States By Years, 1890-1910 In millions of dollars Year Production of gold in the United States Excess of gold imports ( + ) or exports ( — ) Industrial consumption of coin and new bullion Net gain ( + ) or loss ( — ) from preceding sources Increase ( -t- ) or decrease ( — ) in estimated stock of gold 1890 33 — 4 15 + 14 + 15 1891 33 — 34 15 — 16 — 22 1892 33 — 59 15 — 41 — 44 1893 •36 — 7 13 + 16 + 9 1894 40 — 81 10 — 51 — 52 1895 47 — 71 12 — 36 — 36 1896 53 + 46 11 -f 88 + 86 1897 57 11 + 46 + 49 1898 64 4-142 13 +193 +194 1899 71 + 6 17 + 60 + 65 1900 79 + 13 19 + 73 + 92 1901 79 — 3 20 + 56 + 61 1902 80 + 8 23 + 65 + 71 1903 74 4- 21 24 + 71 + 71 1904 80 — 36 23 + 21 + 25 1905 88 + 3 28 + 63 + 71 1906 94 +109 33 +170 +170 1907 90 + 88 34 +144 +147 1908 95 — 31 15 + 49 + 49 1909 100 — 89 30 — 19 — 16 1910 96 34 + 62 + 71 Averages 1890- 99 46.7 — 6.2 13.2 + 27.3 + 26.4 1900- -09 85.9 + 8.3 24.9 + 69.3 + 74.1 d 3 are from the Report on the Production of the Precious Metals in 1909, pp. 13, 14, and 28. The original data in column 3 have been raised $2,000,000 for the years 1893-1902, to correct the original underestimate of the consumption of gold coin in the arts (see Report of the Director of the Mint, 1907, p. 86). Column 2 is from A. P. Andrew, Statistics for the United States (Publications of the National Monetary Commission), p. 11. Column 4 is computed from columns 1, 2, and 3. Column 5 is from Table 71, above. For comparison with these American figures, there are a few official estimates of the gold circulation of the United Kingdom and France, made at irregular intervals. The data are assembled in Table 73. Both of the European countries, like the United States, lost gold between the later eighties and the early nineties." From the early, to the middle nineties, on the contrary, the European countries gained gold and the United States lost. Finally, since the middle nineties all the countries have gained, but at very different rates — the United States five or six times as fast as the European countries, and Great Britain about two times as fast as France. The per capita circulation of gold, however, remains much larger in France than in any other country. 6 The figures for America in 1885 and 1891 indicate a gain, but merely because the loss from 1888-91 was smaller than the gain in 1885-88. 286 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA These European data are so scanty that they may be supplemented by the record of net imports or exports of gold. In England, Prance, and Germany the domestic production of gold is so slight that the customs-house returns are the best available index of the yearly changes in the total stock of gold, though not in the monetary stock/ Of course, part of the net imports are absorbed into industrial use; part of the net exports consist of gold that was not used as money; the existing monetary stock is decreased by melting coins, or TABLE 73 Estimated Monetaby Stock op Gold at Inteevals in the United Kingdom and France, With Estimates foe cokresponding dates in the united states Increase ( + ) or decrease ( — ) in the estimated stock Estimated stock in millions of dollars In millions of dollars In percentages of the stock at preceding estimate Year United Kingdom United States United Kingdom United States ' United Kingdom United ' States 1888 499 650 1892 438 582 — 61 — 68 —12.2% — 10.5% 1895 450 503 + 12 — 79 + 2.7 — 13.7 1903 567 1,192 +117 +689 +26.0 +137.0 France United States France United States France United States 1885 965 558 1891 772 626 —193 + 68 —20.0% + 12.2% 1897 811 638 + 39 + 12 + 5.0 + 1.9 1903 926 1,192 +115 +554 +14.2 + 86.8 Compiled from the National Monetary Commission's Statistics for Great Britain, France, and Germany (Senate document, no. 578, 61st Congress, 2d session), pp. 75 and 345. The British estimates were made by the Royal Mint, except that for 1892, which was made by the Chancellor of the Exchequer. The French estimates were all made by M. de Foville on the basis of official monetary investigations. The British estimate of 1888 is now held to have been too high. The American figures are from the Report of the Director of the Mint, 1907, p. 87. increased by coining plate, etc. But the statistics of Table 74 show that in all three of our foreign countries there has been a rapid increase in the annual supply of fresh gold available for monetary use, and it is safe to suppose that there has been a roughly proportionate increase in the annual additions to the monetary stock. Within this period of twenty years France has absorbed a decidedly larger part of the new gold than Germany, and Germany a slightly larger part than England. But whether the relative increase in the French monetary stock of gold has been larger than the German, or the German larger than the English, remains uncertain. In all three countries the net movements are steadier than in the United States and more uniformly on the side of an excess of imports over exports. Nevertheless, the European oscillations are violent in compar- 7 These are the reasons for suspecting that the statistics of both imports and exports are incomplete, be- cause not all the shipments and receipts are recorded. (Launay, The World's Gold, pp. 165-167.) For this reason no attempt is made to base refined comparisons upon Table 74. MITCHELL: BUSINESS CYCLES 287 TABLE 74 Net Imports ( + ) or Net Exports (— ) op Gold foe the United States, United Kingdom, France, and Germany By Years, 1890-1911 Actual amounts In millions of dollars Average Relative amounts actual amounts in 1890-99 = 100 A Year 1890 United States — 4 United Kingdom +45 France — 26 Germany +14 United States — 65 United Kingdom +139 France —133 ^ Germany + 74 1891 — 34 +30 + 25 +24 — 548 + 93 +128 +127 1892 — 59 +33 + 53 + 7 — 952 +102 +272 + 37 1893 — 7 + 26 + 36 + 9 — 113 + 80 + 185 + 48 1894 — 81 +58 + 68 + 60 —1,306 + 179 +349 +317 1895 — 71 + 71 + 2 + 4 —1,145 +219 + 10 + 21 1896 + 46 —28 — 2 + 5 + 742 — 86 — 10 + 26 1897 + 31 + 9 +159 + 48 1898 + 142 +35 — 22 +25 +2,291 +108 —113 +132 1899 + 6 +54 + 30 +32 + 97 +167 +154 +169 1900 + 13 +38 + 64 +30 + 210 +117 +328 + 159 1901 — 3 +33 + 55 +49 — 48 +102 +282 +259 1902 + 8 + 30 + 61 + 8 + 129 + 93 +313 + 42 1903 + 21 + 4 + 36 +45 + 339 + 12 +185 +238 1904 — 36 + 4 +103 +93 — 581 + 12 +528 +492 1905 + 3 +38 + 125 +43 + 48 + 117 +641 +228 1906 +109 +17 + 52 +69 + 1,758 + 52 +267 +365 1907 + 88 +30 + 56 — 5 +1,419 + 93 +287 — 26 1908 — 31 —19 +192 +74 — 500 — 59 +985 +392 1909 — 89 +36 + 35 + 7 —1,435 +111 +179 + 37 1910 +31 + 11 +42 + 96 + 56 +222 1911 + 20 +42 +35 + 323 +130 +185 Averages 1890-99 — 6.2 +32.4 + 19.5 +18.9 100 100 100 100 1900-09 + 8.3 +21.1 + 77.9 +41.3 134 65 399 218 Compiled from the (American) Statistical Abstract of Foreign Countries, Part i, for the years 1890-1907, aJld completed from the statistical abstracts of England, France, and Germany. The data for the United States are from Andrew's Statistics for the United States (Publications of the National Monetary Commission), p. 11. ison with most of the data exhibited in preceding chapters, as the columns of relative figures show. To account for these changes in detail year by year would be an exceedingly difficult task, because of the multiplicity of the factors affecting the balance of payments in international trade. For present purposes it suffices to note that no simple rule holds for all the countries concerning the relations between the course of business cycles and the net imports or exports of gold. 288 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA III. The Quantity of Silver and of Paper Money The quantity of other forms of money in the United States can be estimated more accurately than the quantity of gold coin. There is no industrial con- sumption of greenbacks and bank notes, and but a trifling industrial consump- tion of silver coin, since silver bullion costs less than half as much as silver dollars. Moreover, neither paper nor silver money is acceptable to foreigners, so that the small sums carried out of the country are promptly sent back again. Only one source of error in the statements need be feared — accidental loss or burning. On this account the treasury has already written off $1,000,000 from the amount of United States notes outstanding, and might safely v^rite off several millions more from that item and from the amount of silver coins and bank notes. But these unrecorded losses cannot make more than a small per- TABLE 75 Monetary Stock of the "United States on July 1 of the Years 1890-1911 Actual amounts in millions of dollars Year Gold Silver dollars Subsidiary silver United States notes Treasury notes of 1890 National bank notes Total Per cent of gold 1890 639 380 77 347 186 1,629 39 1891 591 389 78 347 50 168 1,623 36 1892 600 389 78 347 102 173 1,689 36 1893 532 391 77 347 147 179 1,673 32 1894 548 395 76 347 153 207 1,726 32 1895 542 402 77 347 146 212 1,726 31 1896 507 422 76 347 130 226 1,708 30 1897 594 442 76 347 115 231 1,805 33 1898 747 460 76 347 101 228 1,959 38 1899 849 470 75 347 94 241 2,076 41 1900 917 490 83 347 76 310 2,223 41 1901 1,003 520 90 347 48 354 2,362 42 1902 1,068 540 97 347 30 357 2,439 44 1903 1,124 554 102 347 19 414 2,560 44 1904 1,198 560 107 347 13 449 2,674 45 1905 1,228 559 115 347 9 496 2,754 45 1906 1,343 561 118 347 7 561 2,937 46 1907 1,466 562 130 347 6 604 3,115 47 1908 1,618 563 147 347 5 698 3,378 48 1909 1,642 564 159 347 4 690 3,406 48 1910 1,636 565 155 347 4 713 3,420 48 1911 1,753 565 160 347 3 728 3,556 49 Averages 1890-99 614.9 414.0 76.6 347.0 115.3 205.1 1,761.4 34.8 1900-09 1,260.7 547.3 114.8 347.0 21.7 493.3 2,784.8 45.0 The data for 1890-1909 are from Andrew's Statistics for the United States (Publications of the National Monetary Commis- sion), p. 156. The data for 1910 and 1911 are from the Report of the Treasurer of the United States. The figures for gold in 1890-1900 are revised on the basis of the new estimates made by the Director of the Mint in 1907. See page 282, and note 8, page 289. MITCHELL: BUSINESS CYCLES 289 TABLE 15— {Concluded) MoNETAET Stock op the United States on July 1 of the Years 1890-1911 Year 1890 Kelativ Gold 104 e amounts. Silver dollars 92 Average actual amountE United Subsidiary States silver notes 101 100 ; in 1890-99 Treasury notes of 1890 = 100 National bank notes 91 Total 92 1891 96 94 102 100 43 82 92 1892 98 94 102 100 88 84 96 1893 87 94 101 100 127 87 95 1894 89 95 99 100 133 101 98 1895 88 97 101 100 127 103 98 1896 82 102 99 100 113 110 97 1897 97 107 99 100 100 113 102 1898 121 111 99 100 88 111 111 1899 138 114 98 100 82 118 118 1900 149 118 108 100 66 151 126 1901 163 126 117 100 42 173 134 1902 174 130 127 100 26 174 138 1903 183 134 133 100 16 202 145 1904 195 135 140 100 11 219 152 1905 200 135 150 100 8 242 156 1906 218 136 154 100 6 274 167 1907 238 136 170 100 5 294 177 1908 263 136 192 100 4 340 192 1909 267 136 208 100 3 336 193 1910 266 133 202 100 3 348 194 1911 285 136 209 100 3 355 202 Averages 1890-99 100 100 100 100 100 100 100 1900-09 205 132 150 100 19 241 158 centage of the total. Thus the official figures, reproduced in Table 75, may be trusted to show with approximate accuracy the variations in the monetary stock since 1890.^ So long as the mints were working up the silver bullion purchased under the Sherman Act of July 14, 1890, the stock of silver dollars increased steadily, in dull times as in brisk times, when the currency was redundant as w^hen it was scanty. But the last silver dollar was struck in 1904, and since then the stock has remained substantially constant at about $560 millions. The treasury notes of 1890, issued in payment for silver bullion, also increased rapidly until the Sherman Act was repealed on the first of November, 1893. Thereafter the stock of these notes began to decline as rapidly as they were presented to s The gold and silver certificates need not be included in the table, because they are fully covered by corresponding amounts of gold and silver coins in the treasury. The Director of the Mint has not published his revised estimates for the gold stock on July 1, 1890-1906. I have therefore been compelled to assume that the revised figures for this day would bear a ratio- to the old figures midway between the ratios born by the revised to the old figures for the December preceding and following. 290 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA - CHART 46 Relative: Monetary Stock of Gold , Silver. i— -!A 340 AND Bank Motes in the United States ■■l 1830 -1911. / 520 ER : SILV 3ANK NOTES ; 500 MU i / 280 260 ■ / / 2 SO / / ' 1 ' 1 ■ \ 240 220 M ; -- \ / - 220 200 1 \ 1 // 1 i :" " / 1 ISO 7 / 160 / / 160 140 120 100 /f 140 / S^ / ^* _..• /- / +■- -- -- — - \ ^ 'J / \ / \ "l / / f \ i^ — \ / 80 - 80 f / 1 - 1890 '91 92 '95 '34 '95 '96 '97 '96 '99 1900 '01 '02 03 '04 '05 '06 07 '08 '09 I9I0'|I MITCHELL: BUSINESS CYCLES 291 thf treasury for redemption in silver dollars; for the law had provided that "no greater or less amount of such notes shall be outstanding at any time than the cost of the silver bullion and the standard silver dollars coined therefrom then held in the treasury."" In 1900 the process of reduction v^as hastened by the Gold Standard Act, Avhich required the Secretary of the Treasury to replace the treasury notes which came into his hands by silver certificates, as fast as the remaining bullion was made into dollars or subsidiary coin. In consequence of this measure, the treasury notes have all but disappeared from circulation. Their gradual reduction since 1894 has been roughly concomitant Avith the gradual increase of silver dollars, so that the volume of the two forms of money when taken together has varied within limits of $26 millions — about 1 per cent of the average monetary stock." The estimated stock of the United States notes has not changed at all since the Act of May 31, 1878, stopped the reduction provided for by the Resumption Act of 1875, and directed that these notes when received by the treasury should be ' ' reissued and paid out again and kept in circulation. ' ' The subsidiary coins require little attention, because the volume of "change" in use exercises no perceptible influence upon business conditions, beyond facilitating retail trade. The stock remained nearly stationary from 1890 to 1899, and then began to rise steadily at such a pace as to double in volume by 1909. Since the subsidiary coins may be set aside, since the stock of the United States notes has remained constant, and since the combined stock of silver dollars and treasury notes has changed but little since 1894, it follows that for sixteen years the only variable elements in the American monetary system have been the gold coin and the national bank notes.^^ The bank notes increased at a moderate pace from 1891 to 1899, without much reference to the changing needs of business. But in 1900 the Gold !) See F. W. Taussig, "The Conversion of the Treasury Notes of 1890 into Silver Certificates," Quarterly Journal of Economics, vol. X, pp. 350, 351. 1" When the columns for silver dollars and treasury notes of ±890 are combined the following figures result: Actual Relative Year amounts amounts 1890 380 73 1891 439 85 1892 491 95 1893 538 104 1894 548 106 1895 548 106 1896 552 107 1897 557 108 1898 561 108 1899 564 109 1900 566 109 1901 568 110 1902 570 110 Actual Relative Year amounts amounts 1903 573 111 1904 573 111 1905 568 110 1906 568 110 1907 568 110 1908 568 110 1909 568 110 1910 568 110 1911 568 110 Averages 1890- 99 517.8 100 1900- ■11 569.0 110 11 E. W. Kemmerer, Seasonal Variation in the Relative Demand for Money and Capital in the United States (Senate Document, no. 588, 61st Congress, 2d session), chapter VI, shows that the seasonal elasticity of all kinds of money in circulation outside of the treasury is limited to the fact that the year's normal increase tends to take place in the fall and early winter when currency is most needed. No kind of money exhibits much capacity for contracting in the slack months of the year. 292 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA Standard Act caused an increase of more than 25 per cent in a single year. By raising the limit of note issue from 90 to 100 per cent of the par value of the government bonds held as security, and by reducing the rate of taxation upon notes secured by the new consols of 1930, the law enhanced the profit which national banks already established might derive from exercising their rights of issue. Further, by permitting the organization of national banks with capital of less than $50,000 the law brought a large number of new institutions into the system. The rapid expansion of note circulation started by this statute was afterwards promoted by the efforts of a secretary of the treasury who employed his power of distributing the much desired government deposits to induce the banks to keep outstanding their full quotas of notes." Still later the decline in the market price of the 2 per cent consols to the neighborhood of par tended to raise the profit upon circulation. Finally, the activity of business stimulated the organization of new banks and brought home to new and old an insistent demand for more currency. Favored by all of these circumstances, the volume of bank notes rose after 1899 even faster than the rapidly rising volume of gold coin. Concerning gold, the present table brings out the same facts as Table 71, with a few minor differences arising from the use of data for July 1 in one case, and for December 31 in the other. But the present table also shows the pro- portion borne by the volume of gold money to the total monetary stock. This proportion fell rapidly from 39 per cent in 1890 to 32 per cent in 1893, in conse- quence not only of the direct loss of gold but also of the joint increase of silver dollars and treasury notes of 1890. From 1893 to 1896 the proportion changed but little. But after the free-silver party had been defeated at the polls and business began to revive the incoming flood of gold speedily raised the pro- portion again to 38 per cent in 1898. Since that time there has been a slow but steady advance to 49 per cent in 1911. When all these different kinds of money are added together it appears that the total stock has but a rudunentary power of adjusting its volume to the changing demands of trade. On the whole, the increase in volume has been more rapid during good times than during bad ; but the increase from 1893 to 1894, from 1902 to 1904, and from 1907 to 1908 shows an absence of the power to contract when trade falls off. No paper money is issued by the governments of Great Britain and France, and none by the German government aside from 120,000,000 marks in treasury notes, which offset an equal sum of gold coin held in the war chest. Of course silver coin is widely used in these countries, but no estimates of its volume are regularly published. The European data available for comparison with the 12 For details see A. P. Andrew, "The Treasury and the Banks under Secretary Shaw," Quarterly Journal of Economics, August, 1907, vol. 21, pp. 519-568. MITCHELL: BUSINESS CYCLES 293 preceding figures are therefore limited to the statistics of bank notes in circu- lation. The most significant of these statistics are brought together in Table 76. In none of the three foreign countries has the increase in the stock of bank notes been comparable with the extraordinary increase in America. In Great Britain the quantity has even declined since 1900, probably because the public has acquired the habit of paying a larger portion of small bills by check. In France, on the other hand, the figures reflect an increasing preference among the people for bank notes in place of gold coin — a change in monetary habits which causes the "unproductive circulation" of the Bank of Prance to grow TABLE 76 Average Annual Circulation of Bank Notes in the United States, United Kingdom, France, and Germany By Years, 1890-1911 Actual amounts In millions of dollars Relative amounts Average actual amounts in 1890 ' United United States Kingdom France ■99 - 100 Year United States United Kingdom Prance Germany Germany 1890 128 195 591 285 73 97 89 97 1891 130 197 595 281 74 98 89 96 1892 145 198 608 284 83 99 91 97 1893 165 198 665 276 94 99 100 94 1894 181 195 671 279 103 97 101 95 1895 184 199 681 303 105 99 102 103 1896 205 202 696 300 117 101 104 102 1897 208 205 712 301 119 102 107 103 1898 198 207 713 311 113 103 107 ■ ■ 106 1899 209 211 737 315 119 105 110 107 1900 260 221 779 313 148 110 117 107 1901 323 220 794 320 184 110 119 109 1902 322 219 803 327 184 109 120 111 1903 362 218 832 332 206 109 125 113 1904 407 210 827 341 232 105 124 116 1905 462 211 851 353 264 105 128 120 1906 519 211 899 365 296 105 135 124 1907 558 212 926 386 318 106 139 132 1908 628 210 937 396 358 105 140 135 1909 655 212 980 410 374 106 147 140 1910 685 209 1,003 417 391 104 150 142 1911 699 213 1,012 431 399 106 152 147 Averages 1890-99 175.3 200.7 666.9 293.5 100 100 100 100 1900-09 449.6 214.4 862.8 354.3 256 107 129 121 The American figures show the average amounts of national bank notes secured by bonds outstanding on the first day of each month. Computed from the Reports of the Comptroller of the Oarrency. The British figures show the average aniounts of notes issued by all English, Scotch, and Irish banks in the hands of the public. Prom Palgrave s tables m the National Monetary Com- mission's SJoMsKcs fir Great Britain, Germany, and Prance, p. 125. The Prench figures show the average note issues of the Bank of Prance. Prom the Annuaire Statistique, 1910, p. 68*. The German figures include the notes of all banks of issue, as given by the StatistiM Jahrtiicher fur das Deutsche Reich. The British figures for 1910 and 1911 are based on returns for March, June, September, and December as given in the Statistical Abstract of the United Kingdom, adjusted to fit as nearly as may be the Palgrave series. 294 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA 1" CHART 47. 1 Relative Amount of Bank notes in Circulation / IN the United States , United Kingc 1' FRANCE , AND GERMANY. ■1890 1909. / / 320 300 — United Kingdom . FRANCE Germany \ 320 300 1 i / 1 1 1 / 1 ( P80 260 / [ _]_._ 1 £30 i / 220 200 lao - — ' - / / 1 220 - - — i h- / — 180 ISO — — — -- — — 160 / / / rfC / > 140 20 00 ,c \ / — • _...■'■ 1 \ .--..— 90 - - / .... M-"^ - lL ao 1890 il '92 95 '94 95 96 37 '98 '99 1900 01 '02 '05 '04 '05 '08 07 08 09 1910 MITCHELL: BUSINESS CYCLES 295 steadily larger. In Germany the bank-note currency remained substantially constant in 1890-94 at a level of about $280 millions, in 1895-97 at a level of about $300 millions, and in 1898-1900 at a level of about $313 millions. But after 1900 the volume began to grow steadily, a little faster in good times than in bad. In general there is but a slight degree of correspondence between the fluctu- ations of bank notes and the fluctuations of business activity from one year to the next. Even the European countries which have the most elastic systems of issue do not regularly retire large sums of notes when business is depressed. The controlling factors seem to be changes in monetary habits and perhaps the slow but steady growth in population. A very different conclusion would be drawn, however, if the figures of monthl}' circulation were used in place of annual averages. Then it would appear that there are notable changes between the different seasons of the same year in the amount of notes used. In other words, bank notes in Great Britain, France, and Germany are a much more elastic form of currency within short periods than they are within the longer periods covered by business cycles. IV. The Distribution op the Monetaey Stock Among the Banks, the PiTBLIO, AND the TREASURY Since 1892 the Comptroller of the Currency has utilized his bank reports to compile an annual estimate of the proportions in which the monetary stock is held by the banks, the public, and the federal Treasury. Dr. A. P. Andrew has carried the figures back to 1867." The next table presents these data for 1890-1911 in a revised form. The change in the official estimates of the gold stock in 1890-1906, the amount of money in banks which do not report to the comptroller, the former confusion of "cash" and "cash items" in bank reserves, etc., have all been allowed for as accurately as may be." The figures indicate that on the average the treasury holds a little more than a tenth of the country's money, the banks a little more than a third, and the public a little more than one-half. The banks seem to be slowly increasing their proportion at the expense both of the treasury and of the public. But this average distribution undergoes marked changes, which correspond with the successive phases of business cycles.'' At the height of a panic the public with- draws large sums from the banks, reducing the quota of the latter to its mini- is statistics for the United States, Publications of the National Monetary Commission, p. 155. li'Por tlie details see the note appended to the present chapter, "A Eevised Estimate of the Amount of Money Held by the Banks of the United States in 1890-1911." 15 Compare 0. M. W. Sprague, "The Distribution of Money between the Banks and the People since 1893," Quarterly Journal of Economics, August, 1904, vol. 18, pp. 513-5^8. 296 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 77 Distribution of the Monetary Stock op the United States Among the Public, the Banks, and the Federal Treasury on or About July 1, 1890-1911 Actual amounts lu millions oi dollars Proportions of the total stock held by the ProportioJ stock outsi treasury hf Banks Qs of the dp of fhp Total stock In the treasury as assets Outside of the treasury Held by banks Held ' by the public ;ld by the Year Treasury Banks Public Public 1890 $1,629 $256 $1,373 $492 $881 15.7% 30.2% 54.1% 35.8% 64.2% 1891 1,623 180 1,443 504 939 11.1 31.0 57.9 34.9 65.1 1892 1,689 151 1,538 585 953 9.0 34.6 56.4 38.0 62.0 1893 1,673 142 1,531 517 1,014 8.5 30.9 60.6 33.8 66.2 1894 1,726 144 1,582 680 902 8.3 39.4 52.3 43.0 57.0 1895 1,726 217 1,509 620 889 12.6 35.9 51.5 41.1 58.9 1896 1,708 294 1,414 556 858 17.2 32.6 50.2 39.3 60.7 1897 1,805 266 1,539 649 890 14.7 36.0 49.3 42.2 57.8 1898 1,959 236 1,723 713 1,010 12.0 36.4 51.6 41.4 58.6 1899 2,076 286 1,790 748 1,042 13.8 36.0 50.2 41.8 58.2 1900 2,223 285 1,938 787 1,151 12.8 35.4 51.8 40.6 59.4 1901 2,362 308 2,054 828 1,226 13.0 35.1 51.9 40.3 59.7 1902 2,439 314 2,125 875 1,250 12.9 35.9 51.2 41.2 58.8 1903 2,560 317 2,243 881 1,362 12.4 34.4 53.2 39.3 60.7 1904 2,674 284 2,390 1,016 1,374 10.6 38.0 51.4 42.5 57.5 1905 2,754 295 2,459 1,024 1,435 10.7 37.2 52.1 41.6 58.4 1906 2,937 333 2,604 1,043 1,561 11.3 35.5 53.2 40.1 59.9 1907 3,115 343 2,772 1,139 1,633 11.0 36.6 52.4 41.1 58.9 1908 3,378 341 3,037 1,394 1,643 10.1 41.3 48.6 45.9 54.1 1909* 3,406 309 3,097 1,466 1,631 9.1 43.0 47.9 47.3 52.7 1910 3,420 317 3,103 1,445 1,658 9.3 42.2 48.5 46.6 53.4 1911 3,556 342 3,214 1,573 1,641 9.6 44.2 46.1 48.9 51.1 Averages 1890-99 1,761.4 217.2 1,544.2 606.4 937.8 12.3 34.3 53.4 39.1 60.9 1900-09 2,784.8 312.9 2,471.9 1,045.3 1,426.6 11.4 37.2 51.4 42.0 58.0 * Figures for April 30th, instead of July 1st. For the construction of this table see the note appended to the present chapter, "A Revised Estimate of the Amount of Monev Held by the Banks of the United States." MITCHELL: BUSINESS CYCLES - 297 TABLE 77— (Concluded) Distribution op the Monetary Stock or the United States Among the Public, the Banks, and the Federal Treasury on or About July 1, 1890-1911 Relative amounts Average actual amounts in 1890-99 = 100 Year Total stock In the treasury as assets Outside of the treasury Held by banks Held' by the public 1890 92 118 89 81 94 1891 92 83 93 83 100 1892 96 70 100 96 102 1893 95 65 99 85 108 1894 98 66 102 112 96 1895 98 100 98 102 95 1896 97 135 92 92 91 1897 102 122 100 107 95 1898 111 109 112 118 108 1899 118 132 116 123 111 1900 126 131 125 130 123 1901 134 142 133 137 131 1902 138 145 138 144 133 1903 145. 146 145 145 145 1904 152 131 155 168 147 1905 156 , 136 159 169 153 1906 167 153 169 172 166 1907 177 158 179 188 174 1908 192 157 197 230 175 1909 193 142 201 242 174 1910 194 146 201 238 177 1911 202 157 208 259 175 Averages 1890-99 100 100 100 100 100 1900-09 158 144 160 172 152 298 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA CHART 48. Proportions of the Mo^4EY in Circulation in the United States Held by the Banks and by the Public. ia90 - 1911. I I HELD BY THE BANK5. 1^^ Held by the Public. 100 90 80 100 90 80 10 GO -50 40 30 20 10 no 60 50 40 30 20 10 wJ^/^mM//m^. mMM T^. j 1890 91 92 93 94 35 96 97 98 '99 1300 01 02 '05 '04 '05 '06 '07 '08 '09 I9i0 MITCHELL: BUSINESS CYCLES 299 CHART 49. 260 1 RaAnvE Amounts of Money was bt the banks and / BY THE Public in the united states. / 1690 - 1911. 1 N / 240 HELD BY THE PUBLIC. 1 1 230 220 210 200 190 j 220 2iO 200 ISO ISO / no 150 ,,y 1. t ,-" •fc,,^ .^- ''•^ 1 t 1 1 / 160 150 / / 1 1 / ^ / ■ / 140 130 / / 140 150 / / / 1 / /, / / / 120 no 100 30 / / 120 110 100 90 \ / / / / r ," / ■\ \ \ / 1 1 1 1 / A \ I -- \ /' 1 1 80 ^ ( 80 1890 '91 '92 '» '9* '93 '96 '97 '98 '99 1900 'Ol '02 '05 '04 '05 '06 '07 '08 "09 1910 'll 300 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA mum. As soon as the crisis yields to depression, the current sets strongly in the opposite direction. Idle money accumulates in the banks and raises their quota to its maximum. When business revives and emplojonent becomes more regular a larger proportion of the monetary stock is required for hand-to-hand use, the quota of the banks declines slowly until the climax of prosperity is reached. When the crisis which follows comes on slowly or is mild in character, the banks begin to gain again. But when the crisis degenerates into a panic, the gradual decline of the banks' quota which occurred during the prosperous phase of the cycle suddenly becomes the rapid decline with which we started. These generalizations seem to be justified by the figures of Table 77. But if these figures were annual averages instead of figures for a single day, they would probably show a closer correlation between changes in the distribution of money and changes in business conditions. As matters stand, there seems to be a contradiction between the results for the two great panic years. But in 1893 the panic was at its height on the first of July, while in 1907 on the first of July general business was but just beginning to feel the reaction which developed into the panic of October and November. The exceptionally large holdings by the banks in 1909 may arise from the fact that the data for this year refer to April 30 instead of to July 1, though we do not know enough about seasonal variations of this character to be certain that the banks usually hold a larger proportion of the country's money in midspring than in midsummer. No foreign data upon this subject are available, both because of the scanty materials for estimating the total monetary stock and because of the lack of detail in the bank reports concerning the amounts of money in hand. V. The Volume of Deposit Currency That the currency used in America includes a far larger volume of checks drawn against bank deposits than of money is a matter of common knowledge. The two official efforts to measure these tAvo elements in the currency with precision have been directed, not toward a direct comparison between the quan- tity of money and the quantity of deposits subject to check, but toward a com- parison between the volume of business transactions settled in money and the volume settled in credit instruments. In 1896, Professor David Kinley, who superintended both investigations, concluded that about 80 per cent of all busi- ness payments were made in checks, drafts, etc., and about 20 per cent in money. In 1909 he adopted 80 to 85 per cent as the probable proportion of business done by check. Both of these conclusions were based upon a critical study of reports from the banks concerning the character of funds deposited with them upon specified days. By applying more refined methods of attack. Professor Irving MITCHELL: BUSINESS CYCLES 301 Fisher has reached somewhat different results. His ratios for the use of checks are 86 per cent in 1896 and 91 per cent in 1909/" Important as these results are, they do not answer the present purpose. We need an estimate of the volume' of deposit currency, covering every year since 1890, and comparable with the revised data concerning the monetary stock which have been presented. For such comparisons it has been customary to rely upon the statistics of the individual deposits of the banks. But an investi- gation by the National Monetary Commission has shown that a large proportion of these deposits are subject to conditions Avhich prevent their free use in making payments. Accordingly, it is necessary to ascertain as nearly as may be what part of the individual deposits are actually subject to check in all the classes of banks. The next table shows the results of such an effort, and a note at the end of this chapter explains how these results were obtained. The relative importance of bank checks and of money as constituent elements in this country's currency appears from the figures which show that since 1890 deposit currency has averaged rather more than two-thirds and money outside the treasury rather less than one-third of the total circulating medium. The deposit currency, moreover, has grown at a faster pace than the money in circu- lation. Between 1890 and 1911 the former increased about three and one-half times in volume, the latter about two and one-quarter times. Consequently the proportion of deposit currency to the total circulating medium has risen from 62 per cent to 72 per cent, and that of money has fallen from 38 to 28 per cent. That business habits have changed during these two decades in the direction of a freer use of banking facilities by the business public there can be no doubt. Though this change obscures, it does not hide the fact of greatest present interest — namely, that the ratio of checks to the total volume of currency varies with the course of business cycles. For this ratio has risen fastest in periods of marked prosperity, such as 1897-1902 and 1904-06. On the other hand, the gradual growth of the ratio has ceased and even given place to a shrinkage in periods of business reaction such as 1892-93, 1902-03, and 1906-08. Closely related to but not identical with these changes in the ratio of the deposit currency to the total circulatinsr medium are the changes in the ratio of the monev in the banks to the deposit currency. In the last section it was shown that the monev in the banks has increased faster than the money outside of the treasury. Nevertheless its increase has not kept pace with that of the 16 David Kinley, The Use of Credit Instruments in Payments in the United States, Publications of the National Monetary Commission, pp. 117 and 198-201. The results of the investigation of 1896 are summarized in this volume (pp. 28-30'), and references to Kinley's earlier publications on the subject are given in the bibliog- raphy Cp. 223). For Msher's results, see his Purchannq Power of Money (New York, 1911), pp. 317, 318, 491, 492. An interesting English parallel is afforded by the data concerning the proportion of cash and credit instruments in the receipts of Parr's Bank. (See the National Monetary Commission's Statistics for Great Britain, Germa-n'y. and Prance, p. 144'). On a "normal" day the checks made 97.45 per cent of the total receipts at the metropolitan offices and 85.70 per cent at the provincial offices. On a Saturday these percentages rose to 97.93 and 88.90, and on a stock-exchange settling day to 98.89 and 88.98 per cent respectively. All of the data refer to days in August, 1908. 302 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 78 The Volume of Money and of Deposit Cukrency in the United States on the 30th op June in the Years 1890-1911 Actual amounts In millions of dollars A Aver Relative amounts age actual amounts in 1890-99 = : 100 Year Total monetary stock Money out- side of the treasury Money in the banks Money held by the public Deposit currency Total Money out- monetary side of the stock treasury Money in the banks Money held by the public Deposit currency 1890 1,629 1,373 492 881 2,264 92 89 81 94 82 1891 1,623 1,443 504 939 2,325 92 93 83 100 85 1892 1,689 1,538 585 953 2,615 96 100 96 102 95 1893 1,673 1,531 517 1,014 2,510 95 99 85 108 91 1894 1,726 1,582 680 902 2,578 98 102 112 96 94 1895 1,726 1,509 620 889 2,731 98 98 102 95 99 1896 1,708 1,414 556 858 2,688 97 92 92 91 98 1897 1,805 1,539 649 890 2,747 102 100 107 95 100 1898 1,959 1,723 713 1,010 3,198 111 112 118 108 116 1899 2,076 1,790 748 1,042 3,865 118 116 123 111 140 1900 2,223 1,938 787 1,151 4,205 126 125 130 123 153 1901 2,362 2,054 828 1,226 4,955. 134 133 137 131 180 1902 2,439 2,125 875 1,250 5,367 138 138 144 133 195 1903 2,560 2,243 881 1,362 5,540 145 145 145 145 201 1904 2,674 2,390 1,016 1,374 5,853 152 155 168 147 213 1905 2,754 2,459 1,024 1,435 6,559 156 159 169 153 238 1906 2,937 2,604 1,043 1,561 6,863 'l67 169 172 166 249 1907 3,115 2,772 1,139 1,633 7,109 177 179 188 174 258 1908 3,378 3,037 1,394 1,643 6,522 192 197 230 175 237 1909 3,406 3,097 1,466 1,631 6,808 193 201 242 174 247 1910 3,420 3,103 1,445 1,658 7,713 194 201 238 177 280 1911 3,556 3,214 1,573 1,641 8,242 202 208 259 175 300 Averages 1890-99 1,761.4 1,544.2 606.4 937.8 2,752.1 100 100 100 100 100 1900-09 2,784.8 2,471.9 1,045.3 1,426.6 5,978.1 158 160 172 152 217 The data concerning money are from Table 77, preceding. The data concerning deposit currencv give the results of a revised estimate of the bank deposits subject to check. See the note appended to the present chapter, "The Volume of Deposit Cnrrencj in the United States." MITCHELL: BUSINESS CYCLES 303 TABLE 78— (Concluded)- The Volume of Money and op Deposit Currency in the United States on the 30th of June in the Years 1890-1911 Ratios borne to the volume of deposit currency by the Amount of money outside of the treasury plus the volume of deposit currency Millions of dollars Ratios borne to the money outside of the treasury plus the volume of deposit currency by the Year Total monetary stock Money out- side of the treasury Money in the banks Money held by the public Volume of deposit currency Money out- side of the treasury Money in the banks Money held by the public 1890 72% 61% 22% 39% 3,637 62% 38% 14% 24% 1891 70 62 22 40 3,768 62 38 13 25 1892 65 59 22 36 4,153 63 37 14 23 1893 67 61 21 40 4,041 62 38 13 25 1894 67 61 26 35 4,160 62 38 16 22 1895 63 55 23 33 4,240 64 36 15 21 1896 64 53 21 32 4,102 66 34 14 21 1897 66 56 24 32 4,286 64 36 15 21 1898 61 54 22 32 4,921 65 35 14 21 1899 54 46 19 27 5,655 68 32 13 18 1900 53 46 19 27 6,143 68 32 13 19 1901 48 41 17 25 7,009 71 29 12 17 1902 45 40 16 23 7,492 72 28 12 17 1903 46 41 16 25 7,783 71 29 11 18 1904 46 41 17 23 8,243 71 29 12 17 1905 42 37 16 22 9,018 73 27 11 16 1906 43 38 15 23 9,467 73 2.8 11 16 1907 44 39 16 23 9,881 72 28 12 17 1908 52 47 21 25 9,559 68 32 15 17 1909 50 46 22 24 9,905 69 31 15 16 1910 44 40 19 22 10,816 71 29 13 15 1911 43 39 19 20 11,456 72 28 14 14 Averages 1890-09 65 57 22 35 4,296.3 64 36 14 22 1900-09 47 42 18 24 8,450.0 71 29 12 17 304 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA - Chart 50. 300 ] Relative Amounts of Money in Circulation and of Dcposits 1 1 Subject to Check in the United States. 1 1 1690 - 1911. 1 280 / 1 / / — _-»^ DEPOSITS Subject TO Check. 280 SGO / I / / \ / / \ J i \ / \ S40 1 \ / 240 / \ / / \ 1 1 220 1 220 1 1 i 1 1 / 200 1 1 > / ZOO / ~^ 1 / r 1 1 i , / / / / / / 180 / 1 / ISO 1 1 1 1 / r J / 1 / ISO 1 / 1 y 160 1 <^ 1 / 1 / 1 / 140 1 / 140 1 r^ 1 / 1 t ^ 1 / lEO 1 1 1 / / 1 / 120 / / f J / ^ z V ^ 5^ \ 5i T\ 100 ^ ^ f r JL \ AA. \ 100 / \" ■7 1 " \ Tf t^ J ^ 11 ^ ' / N y \ f \ 1 80 r \ 4f > \ ^ ^ % h «£ Hi lA it 09 0< Si ^ / 80 1890*91 '92 "95 '9^ '35 *9B "97 '96 "99 1900 'Ot '02 'Ob '04 "05 '06 '07 "08 '09 1910 "ll MITCHELL: BUSINESS CYCLES 305 CHART 51. Proportions of the: Circulating Medium of the United States Consisting of deposits Subject to check, Money Held by the banks , and Money Held by the Public. IS90 - 191! . 100 ^m PROPORTION OF MONEY HELD BY THE PUBLIC. ^M Proportion of Money held by the banks - I I Proportion of Deposits subject to Check . 100 90 90 80 70 60 80 70 60 50 30 40 ■40 30 20 10 1890 '91 92 93 '94 '95 '96 '97 '96 '99 1900 'Ol '02 '05 '04 '05 '06 '07 '06 '09 1910 '11 30 20 10 306 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA deposits against which it is held as a reserve. Hence the proportion of money held by the banks to deposits subject to check has fallen from 22 per cent in 1890-99 to 18 per cent in 1900-09. But, once more, the change has not been steady. On the contrary, it has been dominated by the ever-recurring alter- nations of prosperity, crisis, and depression. The highest ratio of money to checking deposits — 26 per cent — came in 1894, the lowest — 15 per cent — in 1906. The juxtaposition of these extreme vaiiations shows how inaccurate is the assumption that the deposit currenc}' ma}' be treated as a substantially constant multiple of the quantity of money in the banks. In Section iii of this chapter it has heen shown that the American monetary stock has slight capacity for adjusting its volume to the changing condition of business. On the whole, it does increase more rapidly in good times than in bad ; but it frequently fails to contract Avlien prosperity passes over into depres- sion. The present table shows that deposit currency is distinctly superior to money in this quality of elasticity. In prosperous times it expands more rapidly than money, and in dull times it is more likely to contract. For example, deposit currency shrank 21 per cent between ] 907 and 1908, while the monetary stock increased 15 per cent." Nevertheless, deposit currency does not have that "perfect elasticity" with which it is sometimes credited." For among the various indices of business conditions presented in Chapter V there are several which reflect changes in the activity of trade more faithfully than does the column of relative figures for deposit currency in Table 78. VI. The Velocity of Circulation The only serious attempt to estimate the velocity with which both money and checks circulate has been made by Professor Irving Fisher for the United States.^° It is based primarily upon the data collected by the Comptroller of the Currency concerning the sums of money and credit instruments deposited in banks on the settling day nearest July 1, 1896, and on March 16, 1909. Figures for the intervening years are interpolated. From these two inquiries Fisher estimates that the total check transactions of the country made 97 billion dollars in 1896 and 364 billions in 1909. Since he puts the deposits subject to check at 2.68 billions in the first 3^ear and at 6.75 in the second, he finds by division that the average turnover of deposit currency in 1896 and 1909 respectively was 26.2 and 53.9 times. If These percentages are from the columns of "relative amounts" in Table 78, and therefore represent ratios to the average actual amounts of both kinds of currency in 1890-99. IS By Professor J. Laurence Laughlin, for example. See his Frinciples of Money (New York, 1903), p. 120. 1^0 Purchasing Power of Money (New York, 1911), Appendix to chapter XII, §§ 4-8. MITCHELL: BUSINESS CYCLES 307 To calculate the velocities for the years 1897-1908, Fisher uses the clearings in New York and "outside New York" as a barometer of business transactions performed by check, allowing the latter clearings five times the weight of the former. But when total check transactions are computed in this fashion for 1896 and 1909 he finds that they exceed the same transactions as estimated from the comptroller's bank inquiries of those years. The two estimates can be made to agree, however, by multiplying the barometer made from clearings by .69 in 1896 and by .88 in 1909. The ratios of correction to be applied to the barom- eter for intermediate years he assumes to rise at a regular rate from .69 to .88. After estimating check transactions in this fashion for each year, he computes the velocity of circulation by dividing these totals by the corresponding estimates of deposits subject to check. A more elaborate method is required in dealing with the velocity at which money circulates. The comptroller's inquiries of 1896 and 1909 allow the total sums of actual money deposited in or withdrawn from the banks to be estimated at 9.6 billions in the course of the first year and at 20.7 billions in the course of the second. So far as these withdrawals are used in payments to enterprises or individuals having bank accounts, Fisher assumes that the money taken out of the bank is exchanged on the average just once before it is redeposited. But when money is drawn from the banks to pay people who keep no bank accounts, Fisher assumes that it changes hands twice on the average before it is returned to the banks by some depositor. The first time it is paid for labor in the typical case ; the second time it is paid by the laborer for groceries, etc., and then it is deposited once more by the retail merchant. Hence the sum of wages paid iu money, plus allowances for money payments to other non-depositors, must be added to the sums of money deposited in banks in estimating the total circu- lation of money against goods. These items are put at 5.7 and 13.1 billions in 1896 and 1909. Finally, five small items, the largest half a billion, are added to cover cases in which money received by depositors is paid out again in cash instead of being put into the banks, etc. The grand total of transactions settled by the use of money is thus raised to 16.2 billions in 1896 and to 35.1 billions in 1909. Dividing these totals by the estimated amount of money in circulation, Fisher finds that the average rate of turnover was 18.6 times in the first year and 21.5 times in the second. It remains to interpolate figures for the intervening years. This task Fisher performs by splitting the difference between two hypotheses — one that the velocity increased at an unvarying pace each year from 18.6 in ]896 to 21.5 in 1909, the other that the changes corresponded to those already estimated for the velocity of check circulation. The final results are as follows : 308 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE 79 Fisher's Estimates of the Velocity of Cieculation of Checks and Money in the United States, 1896-1911 Year Checks Money Year Checks Money 1896 36.2 18.6 1904 40.2 20.7 1897 37.9 19.1 1905 43.1 21.8 1898 39.8 19.8 1906 46.8 21.7 1899 42.6 21.9 1907 44.9 21.1 1900 39.3 20.0 1908 45.7 20.0 1901 40.6 21,8 1909 53.9 21.5 1902 40.9 21.8 1910 52.8 21.0 1903 39.1 20.6 1911 49.9 20.9 Professor Fisher believes that his figures for checks are subject to a probable error of between 5 and 10 per cent, and that his figures for money are probably correct in most cases for the first two digits. But our interest lies rather in the variations between years of depression and years of prosperity than in the absolute accuracy of the figures for any one year. These variations have two sources. First, the original data derived from the comptroller's inquiries^ of 1896 and 1909 show a marked increase in velocities, particularly in the velocity of checks. Second, the distribution of this increase over the intervening years is rendered somewhat irregular by the use of clearings as a barometer of check transactions. The results indicate that both money and checks, but checks more than money, are gaining in velocity of circulation ; but that this gain is unsteady, being rapid in years of high prosperity and being broken by a decline in years of business reaction. The part of this conclusion of chief interest here may be tested by methods which possess slight value for estimating the actual velocity of circulation in any one year. The activity of the check circulation must be reflected, though not without distortion, b)^ the ratio between the bank clearings of a town and its average deposits. The next table, which presents data of this character for New York, Boston, and Philadelphia, amply confirms Fisher's conclusion that the velocity of check circulation rises in prosperity and sinks in depression. In Now York the ratio stood at 93 in 1890, fell to 43 in 1894, rose to 83 in 1901, fell again to 61 in 1904, rose once more to 102 in 1906, and then ran down to 61 in 1908. The Boston figures for these years are 39, 25, 33, 31, 40, 31 ; and the Philadelphia figures are 39, 27, 27, 24, 31, 22. The violence of the changes in these ratios suggests .that Professor Fisher's results under- rather than over- rate the variations in the velocity of circulation from one year to the next. But it is difficult to test this suggestion, because certain of his data have to be interpolated for all years except 1896 and 1909 on the basis of hypotheses which themselves cannot be verified or disproved. MITCHELL: BUSINESS CYCLES 309 TABLE 80 Eatio of the Yearly Clearings to the Average Bank Deposits in New York, Boston, New York Boston AND Philadelphia Philadelphia Year 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 Averages 1890-99 1900-09 Clearings Millions of dollars (1) 37,458 33,749 36,662 31,261 24,387 29,841 28,870 33,427 41,971 60,761 52,634 79,420_ 76,328 65,970 68,649 93,822 104,675 87,182 79,275 103,588 97,275 92,373 35,838.7 81,154.3 Av. deposits Millions of dollars (2) 404.4 409.4 504.4 433.7 568.9 543.3 482.5 602.7 729.8 844.7 852.8 957.4 934.9 898.6 1,118.1 1,120.4 1,025.0 1,065.2 1,302.5 1,347.6 1,216.9 1,372.8 552.38 1,062.25 Ratio (3) 92.6 82.4 72.7 72.1 42.9 54.9 59.8 55.5 a7.5 71.9 61.7 83.0 81.6 73.4 61.4 83.7 102.1 81.8 60.9 76.9 79.9 67.3 66.23 76.65 Clearings Av. deposits Millions of Millions of dollars (4) 5,130 4,753 5,005 4,577 4,148 4,757 4,498 5,095 5,425 7,086 6,180 7,191 6,930 6,717 6,631 7,655 8,335 8,135 7,338 8,440 8,299 8,340 dollars (5) 130.2 129.2 147.2 135.9 166.9 160.0 140.1 173.8- 192.8 228.8 200.4 216.5 211.2 204.2 212.2 223.2 211.2 215.0 235.0 262.1 245.9 270.7 Ratio (6) 39.4 36.8 34.0 33.7 24.9 29.7 32.1 29.3 28.1 31.0 30.8 33.2 32.8 32.9 31.2 34.3 39.5 37.8 31.2 32.2 33.8 30.8 Clearings Millions of dollars (7) 3,710 3,296 3,810 3,403 3,060 3,556 3,161 3,222 3,671 4,811 4,677 5,475 5,875 5,841 5,776 6,928 7,686 7,161 5,937 7,021' 7,690 7,692 Av. deposits Millions of dollars (8) 94.2 95.9 112.1 98.6 113.4 108.3 100.1 119.9 131.4 164.8 178.9 204.9 210.8 210.7 237.8 256.9 249.6 250.4 272.5 314.9 201.9 328.4 Ratio (9) 39.4 34.4 34.0 34.5 27.0 32.8 31.6 26.9 27.9 29.2 26.1 26.7 27.9 27.7 24.3 27.0 30.8 28.6 21.8 22.3 25.5 23.4 5,047.4 160.49 7,355.2 219.15 SouBOES OF Data Columns (1), (4), and (7), A. P. Andrew, iStatistica for the United States sion), p. 8. Column (2), computed from data in ibid., pp. 98-118. Columns (3), (6), and (9), computed from data in the preceding columns. Columns (5) and (8), compiled from weekly reports in the Commercial and the New York banks in 1910 and 1911 are also from this source. The clearings for 1910 and 1911 are taken from the Financial Review. 31.9 3,570.0 113.87 31.77 33.59 6,237.7 238.74 26.32 (Publications of the National Monetary Commis- Financial Chronicle. The average deposits of Pierre des Essars has utilized the reports of the Bank of Prance concerning the receipts, payments, and average balances of its current accounts to show that the average turnover reaches its maximum in years of crises and then declines sharply.^" A continuation of his table to 1911 shows that his conclu- sions hold good of recent years, though the changes after the crisis of 1900 are veiled somewhat by the rapid rate at which the turnover has been increasing in the past decade. 20 Journal de la Societe de Statistique de Paris, April, 1895. 310 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 81 Velocity of Circulation of Private Deposits in the Bank op Trance, Computed According to the Formula of p. des essars, for 1890-1911 Year Sum of the "versements" and "payeraents" In millions of francs "Soldemoyen" multiplied by 2 In millions of francs Velocity of circulation — amounts in 1st column H- amounts in 2d column 1890 108,636 804 135 1891 120,388 866 139 1892 97,430 839 116 1893 97,415 811 120 1894 113,734 890 128 1895 126,889 1,055 120 1896 107,823 1,056 102 1897 109,420 904 121 1898 118,458 896 132 1899 128,151 863 148 1900 130,263 874 149 1901 136,678 932 147 1902 142,023 887 160 1903 148,601 760 196 1904 169,327 989 171 1905 196,701 1,023 192 1906 216,443 1,014 213 1907 208,104 920 226 1908 197,102 932 211 1909 240,692 1,232 195 1910 269,507 1,096 246 1911 293,880 1,071 274 Averages 1890-99 112,834.4 898.4 126.1 1900-09 178,593.4 956.3 186.0 Data from the Annuaire statistique de France, 1909, p. 68* MITCHELL: BUSINESS CYCLES 311 NOTES A REVISED ESTIMATE OP THE AMOUNT OF MONET HELD BY THE BANKS OF THE UNITED STATES IN 1890-1911 Beginning in 1892, the Comptroller of the' Currency has included in his annual reports an estimate of the amount of the total monetary stock held by the federal treasury, by the banks, and by the general public. In Dr. A. Piatt Andrew's Statistics for the United States (Publica- tions of the National Monetary Commission), p. 155, this table is carried back from 1892 to 1867. While these figures afford a satisfactory working basis for estimating the character of the changes in the distribution of money from year to year, they require several corrections. 1. The amount of money held by the banks is computed from the bank reports secured by the Comptroller of the Currency. These reports include all of the national banks, but not all of the state and private banl?s and trust companies. Although the omitted institutions are doubtless small banks for the most part, their number is sufficient to make a considerable deficiency in the published figures for money in the banks. In 1900 and 1902-1911 the comptroller estimated the number and the individual deposits of these institutions from which reports were not received. His figures were as follows : 1900 Number of banks 3,595 Individual deposits $450,000,000 1902 3,732 478,600,000 1903 4,546 502,500,000 1904 3,994 448,000,000 1905 3,500 435,600,000 1906 3,491 413,200,000 1907 4,191 554,900,000 1908 3,654 486,000,000 1909 3,021 389,700,000 1910 4,168 521,600,000 1911 4,159 560,000,000 Another estimate of the number of banks operating under state laws has been made by Professor George E. Barnett in his State Banks and Trust Companies Since the Passage of the National Bank Act (Publications of the National Monetary Commission). Barnett's figures are based upon official state reports, where the latter are available, and elsewhere upon the various almanacs giving the names and addresses of banking institutions. The following table compares Barnett's figures for 1890-1908 with the number of banks reporting to the comptroller: 312 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA Number of banks not reporting Number of State banks A Number of trust companies Number of private banks to the comptroller State banks 433 Trust companies 47* Private banks 2,961 Year 1890 Comptroller 2,101 Barnett^ 2,534 Comptroller 149 Barnett 102. Comptroller 1,344 Barnett 4,305 Total 3,347 1891 2,572 3,102 171 125 1,235 4,230 530 46* 2,995 3,479 1892 3,191 3,484 168 124 1,161 4,004 293 44* 2,843 3,092 1893 3,579 3,700 228 214 848 4,031 121 14* 3,183 3,290 1894 3,586 3,705 224 228 904 3,844 119 4 2,940 3,063 1895 3,774 3,818 242 241 1,070 3,924 44 1* 2,854 2,897 1896 . 3,708 3,917 260 257 824 3,810 209 3* 2,986 3,192 1897 3,857 3,978 251 264 759 3,806 121 13 3,047 3,181 1898 3,965 4,062 246 268 758 3,853 97 22 3,095 3,214 1899 4,191 4,253 260 276 756 4,168 62 16 3,412 3,490 1900 4,369 4,405 290 492 989 5,287 36 202 4,298 4,536 1901 4,983 4,906 334 561 917 5,060 _ 477 227 4,143 4,293 1902 5,397 5,433 417 636 1,039 4,976 36 219 3,937 4,192 1903 5,962 6,111 531 827 1,174 5,417 149 296 4,243 4,688 1904 6,923 6,984 585 924 854 5,484 61 339 4,630 5,030 1905 7,794 7,920 683 1,041 1,028 5,291 126 358 4,263 4,747 1906 8,862 9,334 742 1,337 929 4,823 472 595 3,894 4,961 1907 9,967 10,352 794 1,485 1,141 4,947 385 695 3,806 4,882 1908 11,220 11,295 842 1,496 1,007 4,576 75 654 3,569 4,298 * Com iptroller's figu] res in excess of Barnett's i. Barnett points out that his figures for 1900-08 are swollen by a partial double counting of trust companies as both trust companies and state banks. To indicate the extent of this duplication, he publishes a table (p. 249) showing the numbers of trust companies given by official state reports and the numbers derived from both official and unofficial sources. In answer to an inquiry he Idndly informs me that in 1906-08 the whole number of trust companies officially reported is counted twice in his tables, while in 1900-05 the double counting is probably not over 150 in any year and probably not over half the difference between the numbers reported officially and the numbers ascertained from both official and unofficial sources. On this basis I have framed a rough estimate of the deductions which should be applied to Barnett 's figures. The following columns show the changes which result in the total number of omitted banks, and also compare the corrected figures with the comptroller's estimate of the non-reporting banks. Barnett's estimate of the non-reporting banks Comptroller's estimate of the non-reporting banks Year Original Corrected 1900 4,536 4,446 3,595 1901 4,293 4,193 1902 4,192 4,097 3,732 1903 4,688 4,558 4,546 1904 5,030 4,890 3,994 1905 4,747 4,597 3,500 1906 4,961 4,383 3,491 1907 4,882 4,204 4,191 1908 4,298 3,664 3,654 MITCHELL: BUSINESS CYCLES 313 It will be noticed that Barnett's figures remain higher than the comptroller's, even after the estimated duplications in his lists have been deducted. The cause of the discrepancy is not clear for until 1908 the comptroller did not state upon what source he based his estimates. Barnett, on the other hand, explains that, where official reports are unavailable, his lists are made from Homans' Bankers' Almanac and its continuations — ^standard technical publications. Further, Barnett uses the July edition of the almanac, which makes his results conform in date to the bank reports used. I am therefore inclined to accept Barnett's results as more trustworthy for the present than the comptroller's. For 1909-11, however, I use the comptroller's figures, partly because Barnett accepts them for 1909, and partly because the preceding table shows that the differences between the two estimates had nearly disappeared by 1907 and 1908. 2. But, granted that Barnett's corrected figures show the approximate number of banks for which the comptroller obtains no reports, it remains to determine how much money these insti- tutions probably hold. Ji'rom the preceding figures published by the comptroller for the number and aggregate deposits of the non-reporting banks it is easy to compute the average amount of deposits held by each. These figures agree with the average deposits of the private banks for which reports are obtained, as the following comparison shows : Tear Estimated average individual deposits of non-reporting banks Average individual deposits of the reporting private banks 1900 $125,000 $97,000 1901 129,000 1902 128,000 127,000 1903 111,000 113,000 1904 112,000 112,000 1905 124,000 124,000 1906 118,000 118,000 1907 132,000 132,000 1908 133,000 126,000 1909 129,000 129,000 1910 125,000 133,000 1911 135,000 127,500 The practice of estimating the aggregate deposits of non-reporting banks from the average deposits of the private banks is justified (1) by the fact that the great mass of the non-reporting institutions are themselves private banks, and (2) by the probability that while the non-reporting state banks and trust companies have average deposits larger than those of private banks, the non-reporting private banks have somewhat smaller average deposits than the private banks for which reports are obtained. Indeed, the presumption in favor of the comptroller's later practice is so strong as to discredit his estimate for 1900, in which he puts the deposits of non-reporting banks at a round $450,000,000, without noticing that this figure gives average deposits more than a quarter greater than those of the private banks for which he had returns. 3. The money holdings of the non-reporting banks may be estimated by assuming that these institutions keep cash reserves, corresponding to those of the reporting private banks. One minor difficulty obstructs this procedure. From 1887 to 1895, the comptroller's tables for private banks do not separate ' ' cash ' ' from ' ' cash items. " It is therefore necessary to estimate the amount of the latter from the figures for later years in which "cash" is given under one rubric and "cheeks and other cash items" under another. In the five years 1896-1900 the "cheeks and 314 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA other cash items" made on the average 9 per cent, and "cash on hand" made 91 per cent of the sum of the two items. By applying these two percentages, the ratio of cash to individual deposits may be computed for 1890-95. The amounts are stated in millions of dollars. Private Banks for Which the Comptroller Publishes Reports Year Cash and cash items Cash items Cash Individual deposits Per cent of cash to individual deposits 1890 14.5 1.3 13.2 99.7 13.2% 1891 12.0 1.1 10.9 95.0 11.5 1892 12.2 1.1 11.1 93.1 11.9 1893 9.4 .8 8.6 68.6 12.5 1894 8.0 .7 7.3 66.1 11.0 1895 9.3 .8 8.5 81.8 10.4 4. We are now ready to estimate the amount of money held by banks from which the comp- troller has not secured reports. Year Number of non-reporting banks Average individual deposits of reporting private banks In thousands of dollars Aggregate individual deposits of non-reporting banks In millions of dollars Ratio of cash on hand to individual deposits in reporting private banks Per cent Aggregate money holdings of non-reporting In millions of dollars 1890 3,347 74 248 13.2 33 1891 3,479 77 268 11.5 31 1892 3,092 80 247 11.9 29 1893 3,290 81 266 12.5 33 1894 3,063 73 224 11.0 25 1895 2,897 76 220 10.4 23 1896 3,192 72 230 10.5 24 1897 3,181 66 210 10.1 21 1898 3,214 82 264 9.3 25 1899 3,490 86 300 8.4 25 1900 4,446 97 431 8.6 37 1901 4,193 129 541 6.1 33 1902 4,097 127 520 7.1 37 1903 4,558 113 515 6.5 33 1904 4,890 112 548 6.1 33 1905 4,597 124 570 6.3 36 1906 4,383 118 517 6.1 32 1907 4,204 132 555 5.V 32 1908 3,664 126 462 6.7 31 1909 3,021 129 390 5.7 22 1910 4,168 133 554 5.4 30 1911 4,159 128 560 5.0 28 MITCHELL: BUSINESS CYCLES" 315 The first column shows the number of non-reporting banks as deduced from a comparison between Barnett's tables (corrected for the double counting of trust companies in 1900-08) and the number of banks other than national for which the comptroller publishes reports. The average individual deposits of reporting private banks are computed from the comptroller's data." The third column is made by multiplying the figures in the first column by the corresponding figures in the second. The fourth column, like the second, is computed from the comptroller's data for private banks, but after excluding the "cash items" from the figures for "cash and cash items" in 1890-95. The fifth column is made by applying the percentages of column four to the aggregate deposits of column three. 5. A final correction remains to be made in the comptroller's figure for money in the banks. As has been said, the published reports for private banks in 1890-95 include "cash .items" and "cash" under the single heading. The same is true of the comptroller's figures for state and savings banks and trust companies. To find the amount of money held by these institutions it is therefore necessary to segregate the "cash items." The method adopted toward this end is the one already applied to the private banks. The separately stated amounts of "checks and other cash items" and of "cash on hand" in 1896-1900 were added together, the ratio of each item to the sum of the two was computed, and the average of these ratios was struck for the five-year period. It turned out that ' ' cash items ' ' made on the average 21 per cent of the "cash and cash items" among the state banks, 5 per cent among the trust companies, 9 per cent among the private banks, and 3 per cent among the savings banks. When these ratios are applied to the original returns for 1890-95 the following results expressed in millions of dollars are obtained. State banks Trust companies Private banks A Savings banks All banks other than national A Tear Cash and cash items Cash items Cash Cash and cash items Cash items Cash Cash and cash items Cash items Cash Cash and cash items Cash items Cash Cash and cash items Cash items 1 Cash 1890 120.8 25.4 95.4 19.9 1.0 18.9 14.5 1.3 13.2 30.1 .9 29.2 185.3 28.6 156.7 1891 107.5 22.6 84.9 16.5 .8 15.7 12.0 1.1 10.9 29.7 .9 28.8 165.7 25.4 140.3 1892 129.7 27.2 102.5 22.6 1.1 21.5 12.2 1.1 11.1 33.2 1.0 32.2 197.7 30.4 167.3 1893 137.0 28.8 108.2 22.2 1,1 21.1 9.4 .8 8.6 37.0 1.1 35.9 205.6 31.8 173.8 1894 144.5 30.3 114.2 34.4 1.7 32.7 8.0 .7 7.3 42.4 1.3 41.1 229.3 34.0 195.3 1895 143.1 30.1 113.0 35.9 1.8 34.1 9.3 .8 8.5 39.6 1.2 38.4 227.9 33.9 194.0 6. The preceding results may now be applied to the comptroller's figures for "money in the banks. " The original data for 1890 and 1891 are from Andrew's Statistics for the United States, p. 155, and for 1892-1910 from the Report of the Comptroller of the Currency for 1910, p. 58.^^ The changes consist in adding the estimated amount of money held by the non-reporting banks in 1890-1911, and subtracting the estimated amount of "cash items" included with cash in the reports of banks other than national in 1890-95. Money in banks of the island possessions is not included. The figures are in millions of dollars. The first effort to revise the comptroller's figures for money in the banks was made by Professor Irving Fisher in his Purchasing Power of Money, appendix to Chapter XII, §§2 and 3. His results, which cover the years 1896-1909, run somewhat higher than mine, by amounts which 21 In 1911 the comptroller 's estimate of these deposits is accepted. 22 P. 61 of the report for 1911. 316 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA Year Money in the reporting banks Money in the non-reporting banks Cash items included with cash by the reporting banks Eeviaed estimate of money in the banks 1890 488 33 29 492 1891 498 31 25 504 1892 586 29 30 585 1893 516 33 32 517 1894 689 25 34 680 1895 631 23 34 620 1896 532 24 556 1897 628 21 649 1898 688 25 713 1899 723 25 748 1900 750 37 787 1901 795 33 828 1902 838 37 875 1903 848 33 881 1904 983 33 1,016 1905 988 36 1,024 1906 1,011 32 1,043 1907 1,107 32 1,139 1908 1,363 31 1,394 1909 1,444 22 1,466 1910 1,415 30 1,445 1911 1,545 28 1,573 vary from about ten to -upwards of thirty millions. The chief cause of these differences is that Professor Fisher assumes that the money held by non-reporting banks bears the same ratio to the money held by the reporting banks as the unreported deposits bear to the reported deposits. But this assumption overlooks the facts that the great majority of the non-reporting institutions are private banks, and that the reporting private banks keep smaller reserves in proportion to their deposits than do the whole number of reporting banks. The differences are shown by the following figures from Andrew's Statistics for the United States, p. 34. Proportion of cash to individual deposits Year ' In all reporting banks In reporting private banks 1900 10.0% 8.6% 1901 9.2 6.1 1902 9.0 7.1 1903 8.8 6,5 1904 9.6 6.1 1905 8.5 6.3 1906 8.0 6.1 1907 8.3 5.7 1908 10.4 6.7 1909 9.9 5.7 MITCHELL: BUSINESS CYCLES 317 Further, Professor Barnett's tables of the number of banks other than national in the United States had not been published at the time Professor Fisher made his estimate, and he was there- fore compelled to rely upon the comptroller's estimates of the deposits in non-reporting banks in 1900 and 1902-09, and to supply figures for 1896-99 and for 1901 by interpolation. It is in these years when Professor Fisher had to interpolate that the greatest discrepancies occur between the two estimates. Even then the differences never reach 5 per cent of the smaller sum, and after 1899 they are always less than 1.5 per cent. The following figures compare the two estimates as closely as may be. Year Fisher's estimate in tens of millions of dollars Present estimate in tens of millions of dollars DiflEerences in per cent of the smaller estimate 1896 58 56 3.6% 1897 68 65 4.6 1898 74 71 4.2 1899 77 75 2.7 1900 80 79 1.3 1901 84 83 1.2 1902 88 88 0.0 1903 89 88 1.1 1904 103 102 1.0 1905 103 102 1.0 1906 105 104 1.0 1907 115 114 .9 1908 141 139 1.4 1909 148 147 .7 The results presented here are composed for the years 1896-1910 of materials in which the actually reported elements make never less than 95 per cent of the total, and the estimated elements never more than 5 per cent. A considerable error in the latter elements would there- fore disturb the results but a trifle. In 1890-95 the estimated elements are relatively larger ; but since one set of corrections is added and the other set subtracted the net corrections applied to the original data are slight. Even an error of 300 per cent in the net corrections would not disturb the final results more than 5 per cent. Further, in the table made from these figures for use in the text the money in the banks is compared with a much larger total— namely, the monetary stock of the country — and of course the relative importance of any error contained in the figures is reduced still more. Finally, the conclusions based upon this table in the text are concerned with the changes in the distribution of the money in circulation from one year to another. Of course such conclusions are not appreciably affected by errors which run steadily in the same direction. Despite the considerable number of assumptions involved in the revision of the comp- troller's incomplete figures, the results are therefore sufficiently accurate for the purpose in hand. 318 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA THE VOLUME OF DEPOSIT CURRENCY IN THE UNITED STATES, 1890-1911 Until recently it has been customary to assume that the volume of deposit currency available for business use is best represented by the individual deposits of the commercial banks. But the Special Report from the Banks of the United States, April 28, 1909, obtained by the National Monetary Commission, showed that a large proportion of these individual deposits is not subject to check. At the suggestion of Professor Irving Fisher, Dr. A. P. Andrew, then assistant secretary of the treasury, caused similar investigations into the character of bank deposits to be made for the years 1896, 1899, and 1906. The results confirmed the conclusion based upon the Special Report of 1909 — nearly half of the total individual deposits of commercial and savings banks together were found to be made on conditions which precluded their free use as deposit currency. (Andrew, Statistics for the United States, pp. 151, 152.) In turn, the Comptroller of the Cur- rency included the topic in his annual report and compiled a table classifying the individual deposits of the banks in 1910. At present, therefore, definite statements of the amount of indi- vidual deposits subject to check for all banks from which the Comptroller's OfSce secures reports are available for the years 1896, 1899, 1906, 1910, and 1911. Proportion of Individual Deposits Subject to Check in Banks of Different Classes, in 1896, 1899, 1906, 1909, 1910, and 1911 National Banks Staxe Banks Individual deposits 1,668 Individual deposits subject to check Year 1896 Individual deposits 716 Individual deposits subject to check Year 1896 Actual amount 1,421 Ratio Per cent 85.2 Actual amount 563 Ratio Per cent 78.6 1899 2,522 2,151 85.3 1899 1,099 858 78.1 1906 4,056 3,202 78.9 1906 2,528 1,835 72.6 1909 4,826 3,515 72.8 1909 2,467 1,423 57.7 1910 5,287 4,236 80.1 1910 2,728 1,533 56.2 1911 5,478 4,470 81.6 1911 2,778 1,586 57.1 Mutual Savings Banks Stock Savings Banks 1896 1,740 1896 175 1 .9 1899 2,025 1899 201 3 1.5 1906 2,999 1906 354 45 12.7 1909 3,145 3 .1 1909 569 101 17.7 1910 3,361 1910 710 146 20.6 1911 3,461 2 .1 1911 752 105 14.0 Loan and Trust Companies Private Banks 1896 606 541 89.3 1896 66 60 90.9 1899 1,149 1,013 88.2 1899 74 65 87.8 1906 2,333 1,732 74.2 1906 103 86 83.5 1909 2,836 1,834 64.7 1909 193 105 54.4 1910 3,073 1,977 64.3 1910 125 66 52.8 1911 3,296 2,069 62.8 1911 142 75 52.8 MITCHELL: BUSINESS CYCLES 319 These data are assembled in the table on the preceding page. In preparing this table it has seemed desirable to readjust the original figures to remove two defects. (1) In 1896, 1899, and 1906 "time deposits" estimated at $20,000,000 or more were included with the deposits subject to check. These sums have been distributed among the banks other than national in proportion to their quotas of deposits subject to check, and then deducted from the latter figures. (2) In 1909 and 1910 considerable amounts were reported under the caption "deposits not classified." These sums have been divided proportionately between the deposits which are and the deposits which are not subject to check. The resulting figures show as accurately as the material permits what proportion of the aggregate individual deposits may be treated as deposit currency. The table indicates that, perhaps because of keen competition for customers, the national, state, and private banks and the trust companies have been forced since 1899 to pay interest on an increasing proportion of their deposits. The stock savings banks, on the contrary, have rapidly increased their business with non-savings depositors. Finally, the checking deposits of the mutual savings banks are so small as to be negligible. To estimate the deposit currency of the country since 1890 it is necessary to make some assumption regarding the proportion of deposits which were subject to check in the years inter- vening between the dates for which definite statements have been published. The least objec- tionable assumption is that the changes shown by the figures have been proceeding at a uniform pace. But since the figures for 1896 and 1899 indicate that the movement toward paying interest on a larger portion of deposits scarcely began until after the latter year, the most plausible assumption regarding the years 1890-95 is that they showed the same ratio of checking deposits as 1896. The estimate of the indi\ddual deposits subject to check is framed by applying the ratios, thus adjusted, to the aggregate individual deposits of the various classes of banks. For the national, state, and private banks and the trust companies Andrew gives the individual deposits in his Statistics for the United States, p. 31.^^ It has been necessary to compile the figures for the de- posits of stock savings banks from the annual Reports of the Comptroller of the Currency. The individual deposits of the non-reporting banks are borrowed from the preceding note "A Revised Estimate of the Amount of Money held by the Banks in the United States." For the reasons there explained, the ratios applied to the latter figures are the ratios used for the private banks. The sums of these estimates of deposits subject to check in the various classes of banks, how- ever, overstate the volume of deposit currency in at least one respect. Fisher has pointed out that the exchanges for the clearing house reported by the banks on any given day are counted as deposits both in the banks in which they have been placed for collection and in the banks against which they have been drawn, but to which they will not be presented until the following day.^* The amount of these exchanges is regularly reported for the national banks ; but not for the banks operating under state laws. Satisfactory data for the latter class of banks are available only in the aforesaid Special Report from the Banks of the United States, April 28, 1909. The Comp- troller of the Currency did, indeed, endeavor to secure returns upon this point for his report of 1910 ; but his figures for the state banks, particularly in New York, are so obviously misleading as to deprive the results of significance for present purposes. The figures for 1909 are given below. An estimate of the clearing-house exchanges held by the non-reporting banks is added to the returns. It is made by assuming that these institutions have the same proportion of exchanges to deposits as the private banks. 23 Certain discrepancies appear between the individual deposits of banks other than national in 1896, 1899, and 1906 as given in the preceding and in the following table. These discrepancies are found in the source- Andrew's Statistics for the United States, pp. 31 and 151. The figures on the latter page appear to include returns from a larger number of institutions than the flures on p. 31. 24 Irving Fisher, The Purchasing Power of Money (New York, 1911), pp. 436, 437. 320 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Estimate of the Amount op Individual Deposits Subject to Check in Banks of Difpeeent Classes on Date OP Kepoets Neaeest to June 30, 1890-1911 National banks gtate banks Stock savings banks Year Individual deposits Per cent subject to check Amount subject to check Individual deposits Per cent subject to check Amount subject to check Individual deposits Per cent subject to check Amount subject to check 1890 1,522 85.2 1,297 553 78.6 435 25* 1891 1,535 85.2 1,308 557 78.6 438 32* 1892 1,753 85.2 1,494 649 78.6 510 46* 1893 1,557 85.2 1.327 707 78.6 556 24* 1894 1,678 85.2 1,430 658 78.6 517 30* 1895 1,736 85.2 1,479 712 78.6 560 33* 1896 1,668 85.2 1,421 696 78.6 547 28* 1897 1,771 85.2 1,509 724 78.5 568 43* 1898 2,023 85.2 1,724 912 78.3 714 1* 1899 2,522 85.3 2,151 1,164 78.1 909 3* 1900 2,458 84.4 2,075 1,267 77.3 979 5* 1901 2,942 83.5 2,457 1,611 76.5 1,232 2* 1902 3,099 82.6 2,560 1,698 75.7 1,285 270 6.3 17 1903 3,201 81.7 2,615 1,815 74.9 1,359 303 7.9 24 1904 3,312 80.8 2,676 2,073 74.1 1,536 317 9.5 30 1905 3,784 79.9 3,023 2,365 73.3 1,734 357 11.1 40 1906 4,056 78.9 3,200 2,742 72.6 1,991 391 12.7 50 1907 4,323 76.9 3,324 3,069 67.7 2,078 440 14.3 63 1908 4,375 74.9 3,277 2,937 62.7 1,841 414 16.0 66 1909 4,826 72.8 3,513 2,467 57.7 1,423 569 17.7 101 1910 5,287 80.1 4,236 2,728 56.2 1,533 710 20.6 146 1911 5,478 81.6 4,470 2,778 57.1 1,586 752 14.0 105 *Separately separate reports stated as ; of savings "deposits subject to check," etc., in Reports of the Comptroller deposits and deposits subject to check are dropped until 1910. of the Carre ncy. After 1901 these Estimate op THE Amount op Individual Deposits Subjec ;t to Checi [; in Banks OF DiPFBEBl NT ClASSE s ON Date OF Reports Nearest to June 30, 1890-1911 Loan and trust companies Private banks Non-reporting banks Tear Individual deposits Per cent subject to check Amount subject to check Individual deposits Per cent subject to check Amount subject to check Individual deposits Per cent subject to check Amount subject to check 1890 337 89.3 301 100 90.9 91 248 90.9 225 1891 355 89.3 317 95 90.9 86 268 90.9 244 1892 412 89.3 368 93 90.9 85 247 90.9 225 1893 486 89.3 434 69 90.9 63 266 90.9 242 1894 471 89.3 421 66 90.9 60 224 90.9 204 1895 547 89.3 488 82 90.9 75 220 90.9 200 1896 587 89.3 524 59 90.9 54 230 90.9 209 1897 567 89.0 505 50 89.9 45 210 89.9 189 1898 662 88.6 587 62 88.9 55 264 88.9 235 1899 836 88.2 737 65 87.8 57 300 87.8 263 1900 1,028 86.2 886 96 87.2 84 431 87.2 376 1901 1,271 84.2 1,070 119 86.6 103 541 86.6 469 1902 1,526 82.2 1,254 132 86.0 114 520 86.0 447 1903 1,589 80.2 1,274 133 85.4 114 515 85.4 440 1904 1,600 78.2 1,251 96 84.8 81 548 84.8 465 1905 1,981 76.2 1.510 128 84.2 108 570 84.2 480 1906 2,009 74.2 1,491 110 83.5 92 517 83.5 432 1907 2,062 71.1 1,466 151 73.8 111 555 73.8 410 1908 1,867 67.9 1,268 127 64.1 81 462 64.1 296 1909 2,836 64.7 1,835 193 54.4 105 390 54.4 212 1910 3,073 64.3 1,977 125 52.8 66 554 52.8 293 1911 3,296 62.8 2,069 142 52.8 75 560 52.8 296 MITCHELL: BUSLNfESS CYCLES 321 Exchanges tor the Clearing House Held by Banks op Different Classes on April 28, 1909 Amount Proportion in millions of of dollars the total National banks 303.6 79.7% State banks 62.3 16.3 Mutual savings banks Stock savings banks 1.4 .4 Loan and trust companies 12.2 3.2 Private banks .5 .1 Non-reporting banks 1.0 .3 All banks 381.0 100.0 These figures indicate thai the clearing-house exchanges of the national banks make so large a proportion of the total that they may be accepted as a fairly satisfactory gauge of the changes in the latter. Accordingly, the deductions to be made from the total deposits subject to check are esimated by dividing the exchanges of the national banks given by the report nearest June 30 of each year by .797. The final results of these operations are as follows : Estimate of the Deposit Currency in All the Banks of the United States, on or About June 30, of the Years 1890-1911 Year Estimated individual deposits subject to check Clearing- house exchanges of national banks Estimated clearing-house exchanges of all banks Estimated deposit currency of all banks 1890 2,374 88 110 2,264 1891 2,425 80 100 2,325 1892 2,728 90 113 2,615 1893 2,646 108 136 2,510 1894 2,662 67 84 2,578 1895 2,835 83 104 2,731 1896 2,783 76 95 2,688 1897 2,859 89 112 2,747 1898 3,316 94 118 3,198 1899 4,120 203 255 3,865 1900 4,405 159 200 4,205 1901 5,333 301 378 4,955 1902 5,677 247 310 5,367 1903 5,826 228 286 5,540 1904 6,039 148 186 5,853 1905 6,895 268 336 6,559 1906 7,256 313 393 6,863 1907 7,452 273 343 7,109 1908 6,829 245 307 6,522 1909 7,189 304 381 6,808 1910 8,251 429 538 7,713 1911 8,601 286 359 8,242 The methods just explained differ in several respects from those applied by Professor Irving Fisher in making his pioneer estimate of deposit currency. (1) Before April 26, 1900, the national banks were instructed to report sums due to savings banks under the caption "Due to state banks. ' ' But the Comptroller discovered that certain institutions were including savings- bank deposits with individual deposits. To check this practice the Comptroller required a separate report of sums due to savings banks, and later of sums due to savings banks and trust companies, 322 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA Professor Fisher endeavored to correct this misclassification of deposits in the years 1896-1900 by deducting from individual deposits sums ranging from 160 to 330 millions. He has kindly written me that no deduction whatever should have been made on this score in 1900, since the new rule went into effect in that year. Further, he now thinks that he over-corrected for this error in 1896-99, and that his figures probably would be more accurate had he attempted no cor- rection upon this score. Inspection of the changes resulting in the items "Due to state banks" and "Individual deposits" from the insertion of the new item "Due to savings banks" makes me share Professor Fisher's later view. (Compare the reports for February 13 and June 29, 1900.) Accordingly, I have not made any deduction for misclassification of bank with individual deposits. (2) Professor Fisher's figures for deposits in non-reporting banks are based upon the Comptroller's estimates in 1900 and 1902-09, and upon interpolations in the remaining years which he covers. As explained in the preceding note, my figures are based on Barnett 's count of the number of banks other than national. (3) Instead of working with the individual deposits of each class of banks separately, as I have done. Professor Fisher works with the total deposits of all classes together. This difference of procedure gives different results because the percentage of deposits subject to check is far from uniform among the several classes of banks, and because the amounts of deposits in the several classes have not changed at the same rate. (4) From the deposits of all banks, Professor Fisher's computer deducted the deposits in savings banks fis reported in the text of the Comptroller's report — for example, 1909, p. 44. These figures are considerably larger than the deposits in savings banks reported in the appendices of the same documents — for example, 1909, p. 888. And it is these latter figures which were used by the Comptroller in making up his estimate of total bank deposits. The discrepancies between the two sets of returns average nearly 150 millions in 1901-08, and reach a maximum of 195 millions in 1907. Accordingly, Professor Fisher's figures for individual deposits in the reporting commercial banks are too small. (5) On the other hand. Professor Fisher has not included the checking deposits in stock-savings banks. The preceding tables show that these sums, actually reported or estimated, vary from 1 to 146 millions. (6) Professor Fisher's method of estimating exchanges for the clearing house as explained in his text is practically the same as mine. But for some reason, which is not clear, his computer has obtained results which differ from mine by margins of 5 to 50 millions. Finally, Professor Fisher deducts these exchanges from individual deposits before he applies his percentages of deposits subject to check, while I make the deduction after- ward, on the ground that these exchanges consist chiefly of checks drawn against checking deposits. This difference in method, however, makes little difference in the results because Professor Fisher allows for exchanges in fixing his percentages of deposits subject to check. Despite all these differences in detail, the final results of the two computations harmonize rather closely. As the following comparison shows, the differences vary within limits of .3 and 4.5 per cent of my figures. Minor corrections which Professor Fisher has made in his figures for 1900 and 1908 since the Purchasing Power of Money was published are embodied in the comparison. Year 1896 1897 1898 1899 1900 1901 1902 Fisher's estimate in tens of millions of dollars 268 280 319 390 440 513 543 Present estimate in tens of millions of dollars 269 275 320 387 421 496 537 Differences in percentages of the present estimate -fO.4% —1.8 +0.3 —0.8 —4.5 —3.4 —1.1 Year 1903 1904 1905 1906 1907 1908 1909 Fisher's estimate in tens of millions of dollars 570 580 654 684 713 675 Present estimate in tens of millions of dollars 554 585 656 686 711 652 681 Differences in percentages of the present estimate —2.9 -1-0.9 +0.3 +0.3 —0.3 —1.2 +0.9 CHAPTER VII THE CONDITION OF THE BANKS The primary sources of information concerning the relations between busi- ness cycles and banking are the statements which show the condition of the banks at regular intervals. Material of this character is far more abundant for the United States than for England, Prance, or Germany. The central banks of these three countries, indeed, publish weekly balance sheets which enable one to follow their opera- tions in periods of prosperity, crisis, and depression in some detail. But the reports of the Bank of England, the Bank of Prance, and the Reichsbank do not give an adequate picture of the effects of business cycles upon banking or of banking upon business cycles. Por the operations of these institutions are vastly exceeded, both in vokime and variety, by the operations of joint-stock and private banks in the several countries. Concerning the latter classes of banks the National Monetary Commission has recently brought together much information hitherto unavailable.^ Nevertheless, the reports remain too incom- plete, too infrequent, and too lacking in detail to match the American material as a basis for investigation. Por this country, we have (1) the condensed weekly statements of the clearing-house banks in certain great cities, (2) five detailed statements each year for the national banks, and (3) one statement each year for most of the banks operating under state laws. By analyzing these statements we may find what changes in the condition of the banks usually accompany the progress of a business cycle from the moment of incipient revival of activity to the ultimate return of depression. With these results in hand we can then make the best of the scantier European material. I. The Clearing-House Banks of New York It is well to begin with the clearing-house banks of New York, both because their reports are more frequent than those of the national banks and because the phenomena of business cycles are more pronounced in financial centers than in the country as a whole. 1 statistics for Great Britain, Germany, and France (Senate Document, no. 578, 61st Congress, 2d session), Washington, 1910. [323] 324 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA The New York material is presented in two tables, one of which averages the weekly reports by years, the other by phases of business cycles. Either set of averages, however, may prove misleading. For example, if cirulation averages larger during a period of business depression than during the pre- ceding period of crisis, it does not necessarily follow that the banks increased their note issue after the pressure relaxed. On the contrary, they may have withdrawn a part of the issues made during the crisis and still have left the average circulation for the whole period of depression higher than before. Accordingly, it is necessary to suxjplement the use of the tables in the text by continual references to the weekly returns from which they were made. When the following statements do not agree precisely with the indications of the tables, it is because they are based on the weekly reports. Among all the items included in the statements of the Associated Banks, circulation is by far the smallest in actual amoimt, but shows by far the most rapid rate of growth from 1890 to 1910. The latter fact obscures somewhat the effect of business cycles. None the less, certain regularly recurring relations can be made out between the volume of note issue and the condition of business. (1) During minor crises the circulation increases little; but when the demand for cu.rrency becomes intense, as in 1893, 1896, and 1907, the banks take out additional notes as fast as they can buy bonds and make the necessary arrange- ments with the treasury. But the increase is tardy and the maximum circu- lation is not reached until several weeks after the strain upon the banks has begun to relax. (2) When crisis yields to depression the banks begin to contract their circulation ; but the reduction in volume is even slower than the preceding increase. (3) A revival of business activity is accompanied by a slight increase of note issues, which sometimes has and sometimes has not continued as full prosperity is attained. (4) Finall}^ when prosperity has run its course and a major crisis approaches, circulation expands but a trifle, as in 1893, or declines, as in 1907. The circulation of the New York banks, then, possesses a certain degree of elasticity in the sense that the volume rises when business revives after a period of depression, attains its highest points immediately after panics, and contracts slowly when depression returns. But the amount issued in New York is so small in comparison with that of deposit cui-rency as to count for little in meeting the changing needs of business. And the degree of elasticitj^ exhibited is less than that found under most foreign systems of note issue.^ Since about 1902, the behavior of bank loans in New York during the typical phases of business cycles has been distinctly different from what it was formerly. Prom 1890 to 1902 the banks were able to contract their loans slightly on the 2 See chapter VI, iii. MITCHELL: BUSINESS CYCLES 325 TABLE 82 Annual Averages of the Weekly Statements of the Clearing-Hodse Banks op New York City, 1890-1911 Actual amounts In millions of dollars K Relative amounts Average actual amounts in 1890-99 = 100 Capital and Year surplus 1890 120.8 Circulation 3.6 Net I deposits 404.4 Loans 399.8 Lawful money 104.5 Per cent of reserve 25.88 Capital and surplus 92 Cir- culation 34 Net deposits 73 Loans 79 Lawful money 64 1891 124.2 4.3 409.4 400.9 114.6 27.98 95 40 74 80 70 1892 127.5 5.5 504.4 472.9 141.7 28.00 97 51 91 94 86 1893 131.3 8.5 433.7 419.5 130.2 29.70 100 80 79 83 79 1894 132.3 10.9 568.9 471.0 213.6 37.59 101 102 103 93 130 1895 134.1 13.1 543.3 497.7 164.2 30.17 103 123 98 99 100 1896 134.3 16.2 482.5 463.9 142.1 29.38 103 152 87 92 87 1897 133.9 15.4 602.7 538.2 189.2 31.45 102 144 109 107 115 1898 133.9 14.7 729.8 637.0 213.4 29.32 102 138 132 126 130 1899 136.0 14.6 844.7 739.9 228.1 26.94 104 137 153 147 139 1900 158.7 24.3 852.8 779.5 228.8 26.82 121 228 154 155 139 1901 173.6 31.1 957.4 880.1 253.2 26.45 133 291 173 175 154 1902 201.9 34.5 934.9 894.5 244.1 26.11 154 323 169 177 149 1903 237.4 44.5 898.6 909.2 236.6 26.32 181 417 163 180 144 1904 249.7 39.8 1,118.1 1,061.2 307.0 27.43 191 373 202 211 187 1905 254.5 48.5 1,120.5 1,090.5 290.1 25.87 195 454 203 216 177 1906 267.7 49.6 1,025.0 1,044.8 263.3 25.68 205 464 186 207 160 1907 288.9 53.0 1,065.2 1,111.4 265.3 24.89 221 496 193 220 162 1908 288.0 57.5 1,302.5 1,240.4 365.4 28.04 220 538 236 246 223 1909 299.7 50.3 1,347.6 1,305.1 352.5 26.14 229 471 244 259 215 1910 319.1 48.4 1,216.9 1,223.5 322.8 26.70 244 453 220 243 197 1911 331.1 47.9 1,372.8 1,340.7 369.2 26.91 253 448 249 266 225 Averages 1890-99 130.83 10.68 552.38 504.08 164.16 29.648 100 100 100 100 100 1900-09 242.0] 43.31 1,062.26 1,031.67 280.62 26.375 185 406 192 205 171 Data for 1890-1909 compiled from A. P. Andrew, Statistics for the United States (Publications of the National Monetary Com- mission), pp. 98-118; data for 1910 and 1911 compiled from the Financial Review; data for capital, surplus, and circulation in 1910 and 1911 compiled from the Commercial and Financial Chronicle. 326 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Chart 52 / \ Relative Amounts of the Loans , Deposits . and Reserves / \ 250 / \ 220 210 200 130 OF THE CLEARING House Banks of New York. 1890 1910. \/ \ 240 250 220 210 200 - 190 / k \ Loans. Deposits . Reserves . / 1 1 .'••• \ \ \ 1 / \ /, 'i '''-■ . - I r- \ / 1 \ V V \ i I y i IflO '; \ 180 y 1 : no IGO 150 S 1 ', / . \ 160 ISO 1 \ \ 1 : \ _..-' / -/; \ // ^ / \ 140 11 • 140 130 ISO n \ 120 'I 110 100 90 SO 5 ■'/ i 110 100 90 80 : s ' ; ' / \ :/ / V 7 // A. \\ •••A ••V f j \ ^^ I: f.' 70 70 .•' 60 60 1890 91 92 '95 'Sl\- '95 '96 '97 '98 '99 1900 'Ol '02 'OJ '04 'OS '06 '07 '08 '03 1910 MITCHELL: BUSINESS CYCLES 327 3B CHART 53. 36 1 \ RATIO OF THE RESERVES TO THE NET DEP05IT5 OF THE aEARlNG-HOUSE BANKS OF NEW YORK. \ 34 \ ANNUAL AVERAGES Id90 - 1910. 32 \ / V 32 30 28 / L N / \ \ 30 28 26 24 26 / \ / \ i \ ^ 24 \ / 1890 91 '92 "95 '94 "95 'SS '97 '98 '99 1900 '01 '02 '03 '04 '05 '06 '07 'OS '09 1910 TABLE 83 Condition of the Cleaeing-House Banks op New Yoek City in Seasons op Depression, 1890-1911 Actual amounts in millions of dollars Circulation Loans January, 1890-July, 1890— Prosperity 3.6 402.9 August, 1890-Deeember, 1890 — Minor crisis 3.5 395.3 January, 1891-July, 1891 — Depression 3.5 396.8 August, 1891-August, 1892— Prosperity 5.5 454.0 September, 1892-April, 1893 — Approach of crisis 5.6 449.9 May, 1893-October, 1893 — Major crisis 8.6 406.6 November, 1893-March, 1895 — Severe depression 11.4 466.3 April, 1895-September, 1895— Eevival 13.2 503.8 October, 1895-June, 1896 — Eenewed depression 14.1 475.3 July, 1896-October, 1896 — Free silver campaign 17.4 460.8 November, 1896-June, 1897 — Depression 16.8 510.8 July, 1897-February, 1898— Eevival 14.7 587.0 March, 1898-April, 1898— Spanish War impending 13.9 595.5 May, 1898-September, 1899— Prosperity 14.6 706.3 October, 1899-December, 1899 — Minor crisis 16.0 687.7 January, 1900-September, 1900— Slight depression 22.2 773.7 October, 1900-October, 1902— Prosperity 31.3 877.6 November, 1902-July, 1904— "Eich man's panic" 42.4 942.0 August, 1904r-August, 1905— Eevival 44.0 1,113.7 September, 1905-September, 1906— Prosperity 50.7 1,042.6 October, 1906-September, 1907— Approach of crisis 50.9 1,086.4 October, 1907-December, 1907— Major crisis 58.7 1,148.1 January, 1908-September, 1908— Severe depression 59.8 1,214.0 October, 1908-December, 1909— Eevival 50.1 1,309.3 January, 1910-December, 1911— Keaction 48.2 1,282.1 Business Pbospeeitt, Ceisis, and Net deposits 413.1 Lawful money 107.9 Batio of reserve 26.19 391.6 99.3 25.41 404.7 113.6 28.11 484.0 138.8 28.57 462.3 124.0 26.81 400.6 111.1 27.47 552.3 202.1 36.65 556.3 171.7 30.82 502.7 147.6 29.38 466.1 130.9 28.07 553.8 182.7 32.89 676.2 191.6 30.08 678.9 203.2 29.95 814.0 229.3 28.27 751.8 192.0 25.54 853.7 231.9 27.15 942.9 247.3 26.22 952.5 255.6 26.76 1,169.1 309.6 26.46 1,031.7 265.3 25.70 1,052.3 270.2 25.66 1,058.1 235.8 22.33 1,270.2 362.1 28.44 1,359.3 357.0 26.24 1,294.9 346.0 26.81 328 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE 8S— (Concluded) Condition of the Clearing-House Banks of New York City in Seasons of Business Prosperity, Depression, 1890-1911 Relative amounts. Average actual amounts in 1890-1899 = 100 Net Circulation Loans deposits January, 1890-July, 1890— Prosperity 34 80 75 August, 1890-Deeember, 1890— Minor crisis 33 78 71 January, 1891-July, 1891— Depression 33 79 73 August, 1891-August, 1892— Prosperity 51 90 88 September, 1892-April, 1893— Approach of crisis 52 89 84 May, 1893-October, 1893— Major crisis 81 81 73 November, 1893-Mareh, 1895— Severe depression 107 93 100 April, 1895-September, 1895— Revival 124 100 101 October, 1895-Jiine, 1896— Eenewed depression 132 94 91 July, 1896-Oetober, 1896— Free silver campaign 163 91 84 November, 1896-June, 1897— Depression 157 101 100 July, 1897-February, 1898— Revival 138 116 122 March, 1898-April, 1898— Spanish War impending 130 118 123 May, 1898-September, 1899— Prosperity 137 140 147 October, 1899-December, 1899— Minor crisis 150 136 136 January, 1900-September, 1900— Slight depression 208 153 155 October, 1900-Oetober, 1902— Prosperity 293 174 171 November, 1902-July, 1904— "Rich man's panic" 397 187 172 August, 1904-August, 1905— Revival 412 221 212 September, 1905-September, 1906— Prosperity 475 207 187 October, 1906-September, 1907— Approach of crisis 477 216 191 October, 1907-December, 1907— Major crisis 550 228 192 January, 1908-September, 1908— Severe depression 560 241 230 October, 1908-December, 1909— Revival 469 260 246 January, 1910-December, 1911- Reaction 451 254 234 Crisis, and Lawful money 61 69 85 76 68 123 105 90 80 111 117 124 140 117 141 151 156 189 162 165 144 221 217 211 approach of crises and to contract tlieni much more radically during crises. In the succeeding periods of depression they expanded loans, despite the inac- tivity of trade — a result due in large part to the accumulation of idle funds sent by the country banks to New York and to the inclusion of security holdings with discounts under the caption of loans in the weekly statements. Finally, when business revived, the banks increased their loans much faster than during depression, and continued in this course as long as prosperity reigned.^ In the "rich man's panic" of 1903-04, on the contrary, the New York banks not only failed to contract but even expanded their loans. During the pros- perous years 1905 and 1906, when a further rapid expansion might have been expected, the banks were able to carry their loans only a little above the level attained at the end of 1904. When the panic of 1907 came on, they were again ' Save, of course, for the seasonal changes which recurred with considerable regularity from year to year. MITCHELL: BUSINESS CYCLES 329 forced to increase their loans under circumstances when they would fain have enforced a drastic contraction. To complete the anomaly, they made heavy extensions of loans in the face of the severe business depression of 1908. The changes of 1909-10, however, were more regular. The banks expanded loans during the short-lived revival of activity and contracted them again when business relapsed into dullness. Save perhaps for the moderate increase of loans during periods of depres- sion, the fluctuations of loans in 1890-1902 are what writers upon crises regard as "normal."' But certain of the fluctuations in 1903-07, particularly the expansion of loans during crises and the slight expansion during periods of abounding prosperity, are highly curious. The most plausible explanation given is that based upon the relation of the "out-of-town" banks and the New York trust companies to the money market. When interest rates become very high, particularly rates upon call loans, both sets of institutions and also certain railway, insurance, and industrial corporations which control large funds, with- draw their balances from the clearing-house banks and lend the money upon their own account to stock brokers, etc. On the contrary, when the call-loan rate falls to the neighborhood of 2 per cent these enterprises find it advanta- geous to redeposit their funds in the banks, content with the low rate of interest paid upon balances. Such movements help to explain both the slight expansion of loans in 1905-06 and the rapid expansion in 1908. For the withdrawal of balances reduced the ability of the clearing-house banks to lend in the years of prosperity, and the return of these balances increased their ability to lend in the years of depression. The increase of bank loans during the crisis of 1903-04 is probably due to the fact that the clearing-house institutions were forced to "carry" many important customers who had overloaded themselves with "indigestible securities." In the crisis of 1907 the primary source of difficulty was that both the out-of-town banks and the trust companies suddenly with- drew from the New York loan market. Together they exhausted the possi- bility of loan contraction, and to avoid widespread disaster the clearing-house banks were forced to take over some of the loans which these competitors had been carrying." With few exceptions. New York deposits fluctuate in the same direction as loans. But the degree of rise or fall in these two items is often far from equal. Certain of the differences appear to be characteristic of specific phases of the business cycle. (1) During crises deposits decline more than loans, or, as in 1903-04 and in 1907, rise less. (2) During periods of depression following 4 However " normal ' ' it may be for banks to contract loans during a crisis, ability to expand them is much to be preferred. 5 Compare O M W. Sprague, History of Crises under the National Banking System (Publications of the National Monetary' Commission), p. 300. See also chapter XII, iii, 3, below. 330 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA upon crises, deposits rise more than loans. (3) When business revives after depression deposits usually expand somewhat less rapidly than loans, though this rule, unlike the others, has been subject to exceptions within the period covered. (4) The same rule applies when a business revival develops into full prosperity — both items expand, but loans faster than deposits. These relations stand out more clearly if the ratio of loans to deposits be computed. The next table shows that this ratio rises on the approach of a crisis, attains its maximum during the crisis, and then falls off. If the suc- ceeding period of depression be severe, the ratio reaches its lowest point ; but in such brief seasons of business contraction as that of 1891 the readjustment is not worked out until after a revival of activity has come. In either case, the return of prosperity is accompanied by a rise of the ratio, which continues imtil the next crisis. This ratio, indeed, forms one of the best barometers of business conditions, though it is less reliable as an indication of fair weather than as a warning of approaching storm. TABLE 84 Ratio of Loans to Net Deposits in the Cleaeing-House Banks of New York By years By phases of business cycles 1890-1911 1890-1911 1890 98.9 January, 1890-July, 1890 — Prosperity 97.5 1891 97.9 August, 1890-Deeember, 1890— Minor crisis 100.9 1892 93.8 January, 1891-July, 1891— Depression 98.1 1893 96.7 August, 1891-August, 1892— Prosperity 93.8 1894 82.8 September, 1892-April, 1893— Approach of crisis 97.3 1895 91.6 May, 1893-Oetober, 1893— Major crisis 101.5 1896 96.2 November, 1893-March, 1895— Severe depression 84.4 1897 89.3 April, 1895-September, 1895— Revival 90.6 1898 87.3 October, 1895-June, 1896 — Renewed depression 94.6 1899 87.6 July, 1896-October, 1896— Free silver campaign 98.9 1900 91.4 November, 1896-June, 1897 — Depression 92.2 1901 91.9 July, 1897-Pebruary, 1898— Revival 86.8 1902 95.7 March, 1898-April, 1898— Spanish War impending 87.7 1903 101.2 May, 1898-September, 1899— Prosperity 86.8 1904 94.9 October, 1899-December, 1899— Minor crisis 91.5 1905 97.3 January, 1900-September, 1900— Slight depression 90.6 1906 101.9 October, 1900-October, 1902— Prosperity 93.1 1907 104.3 November, 1902-July, 1904— "Rich man's panic" 98.9 1908 95.2 August, 1904-August, 1905— Revival 95.3 1909 96.9 September, 1905-September, 1906— Prosperity 101.1 1910 100.5 October, 1906-September, 1907— Approach of crisis 103.2 1911 97.6 October, 1907-December, 1907— Major crisis 108.5 Averages January, 1908-8eptember, 1908— Severe depression 95.6 1890-99 92.21 October, 1908~December, 1909— Revival 96.3 1900-09 97.07 January, 1910-December, 1911— Reaction 99.0 MITCHELL: BUSINESS CYCLES 331 Chart 54. Ratio of the Loans to the Net Deposits of the Clearing House Banks- of New York. 106 1890 - 1910. i 104 102 102 / jl 1 100 / 1 100 / / 98 96 \, / / 98 36 \ / / / / 1 \ / / \ / ' / 1 / 94 92 \ / 1 / / 94 92 \ / / 1 1 / ^ 90 8fi / 90 8a 1 \ \ / \ r &6 36 84 82 84 82 1890 'S '92 '93 '94 '95 '96 '97 '98 '99 1900 'Ol '02 '03 '04 '05 '06 '07 '08 'o 3 1910 332 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA The ' ' specie and legal tenders ' ' held by the New York banks, that is, their cash reserves, have declined in every crisis since 1890, and at a pace roughly proportionate to the severity of the disturbance. Almost before the crises were over, however, reverse movements have set in on such a scale as within a few weeks to make the banks stronger in cash than before the troubles began. This immense accumulation of money in the bank 'vaults has more than once begun to decline again before business revived. In other cases the resumj^tion of activity has been accompanied by an outflow of cash from New York. But business revivals have usually come in the autumn when currency would have been shipped west to move the crops, even though depression had continued unbroken. Finally, the periods of full-fledged prosperity have been accom- panied by a moderate gain, or by a small loss of cash. In 1902, for example, the average reserves were less than in 1901 ; in 1906 they were less than in 1905, and in the latter year less than in 1904. Not less significant than the actual amount of the reserves is the ratio borne by reserves to deposits. In good times the New York clearing-house banks as a group have been content to carry reserves but slightly above the minimum set for national banks in central-reserve cities — 25 per cent of their net deposits. When crises have occurred, reserves have usually fallen for a time below this lunit. The minimum ratios reached in the successive crises of the last two decades have been as follows: 24.13 per cent in 1890, 20.55 per cent in 1893, 26.84 per cent in 1896, 24.62 per cent in 1899, 25.06 per cent in 1903, and 19.98 per cent in 1907. During the succeeding periods of depression, reserves have risen well above 25 per cent, as the following list of maxima shows : 30.94 per cent in 1891, 45.20 per cent in 1894, 35.51 per cent in 1897, 28.87 per cent in 1900, 29.84 per cent in 1904, and 30.06 per cent in 1908. These maximimi ratios have all been reached before business began to revive again. In the course of the revival the decline of the ratio has continued, and when no reaction has inter- rupted the movement of business expansion the figure has presently returned to the neighborhood of 26 per cent. The seasonal outflow and inflow of cash, combined with the seasonal expansion and contraction of loans, has maintained continual oscillations of the ratio ; but when prosperity has been long continued the level of these oscillations has slowly declined, and toward the end of the prosperous phase of the cycle the reserves usually have dipped from time to time below the level of 25 per cent. To summarize the results of the preceding analysis: In times of crisis the New York banks have increased their circidation, though tardily; they have contracted their loans in the earlier crises, but have been forced to expand them in 1903 and 1907 ; their deposits have fallen more or risen less than their loans, so that the ratio of loans to deposits has invariably increased; and they have lost cash at such a pace as to reduce the ratio of their reserves to deposits. MITCHELL: BUSINESS CYCLES 333 In times of depression the banlcs ha^-e slowly reduced their circulation, and increased their loans. But their deposits have risen faster than loans, so that the ratio of loans to deposits has fallen. Money has flowed into their vaults in large amounts and raised the percentage of reserve to the highest points attained at any stage of the business cycle. When business has revived after depression, the banks have usually increased their note issues somewhat, and expanded their loans rapidly. The rise of deposits has not long kept pace with the increase of loans, so that the ratio of loans to deposits has risen presently, if not at the outset of the revival. Reserves have usually exhibited an uncertain sagging tendency; at least they have not grown as fast as deposits. In consequence, the ratio of reserves to deposits has described a descending saAv-toothed curve, tlie decline often beginning before depression has been relieved. As revival has developed into prosperity, the banks have seldom done more than to maintain their circulation unimpaired. On the contrary, they have continued to expand loans at a faster rate than their deposits have grown. Hence the i-atio of loans to deposits has risen gradually. In some cases the actual amount of cash has increased, in others decreased; but the ratio of reserA^es to deposits has continued the checkered decline which marked the period of revival. II. The National Banks The next qviestion is whether the changes shown by the clearing-house banks of New York during the successive phases of business cycles are peculiar to that center or are characteristic of the Avhole country. Since the reports for all commercial banks are available for onl}^ one date in each year, it is better to base the analysis upon the fuller data for the national banks. A condensed abstract of the resources and liabilities of these institutions, made from the Reports of the Comptroller of the Currencij, is presented in the following table." 6 In this table "loans" include "loans and discounts" and "overdrafts"; "United States bonds" include "U. S. bonds to secure circulation," "U. S. bonds to secure II. S. deposits," "U. S. bonds on hand," and "premiums"; "other bonds, securities, etc.," include "other bonds to secure U. S. deposits," and "bonds, securities etc. " • " due from banks ' ' includes ' ' due from approved reserve agents, " " due from national banks not reserve agents," and "due from state banks, bankers, trust companies, etc."; "checks and exchanges" include "checks and other cash items," "exchanges for the clearing house," and "bills of other national banks"; "cash" includes "fractional currency, nickels, cents," "specie," "legal tender notes," and "U. S. certificates of deposit"; "miscellaneous resources" include "banking house, furniture, and fixtures," "other real estate owned," "five per cent redemption fund," "clearing-house loan certificates, net balance," and "due from the IT. S. Treasurer, other than the 5 per cent fund"; "capital, etc.," includes "capital stock paid in," "surplus fund," and "undivided profits less expenses and taxes"; "circulation" includes "national bank notes outstanding"; "individual deposits" include "individual deposits" and "dividends unpaid"; house loan certificates," "state bank notes outstanding," "bonds borrowed," "notes and bills rediscounted, "bills payable," "reserved for taxes," and "liabilities other than those above stated." 334 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 85 Condensed Abstract of the Resources and Liabilities of All National Banks as Shown by Their Reports TO THE Comptroller of the Currenct Actual amounts in millions of dollars Date 1890 Feb. 28 Loans, etc. 1,845 U. S. bonds 195 Other bonds, securities, etc. 117 Due from banks 331 Checks and exchanges 149 Cash 278 Miscellaneous 89 May 17 1,904 194 117 325 104 275 91 July 18 1,934 194 116 325 123 282 87 Oct. 2 1,986 185 116 336 142 283 93 Dec. 19 1,932 184 117 300 123 279 112 1891 Feb. 26 1,928 186 121 321 110 303 95 May 4 1,970 187 122 321 164 304 99 July 9 1,964 187 122 318 118 311 94 Sept. 25 2,005 190 125 339 155 298 101 Dec. 2 2,001 192 128 354 146 311 105 1892 Mar. 1 2,059 195 138 420 167 355 103 May 17 2,108 197 144 412 137 374 106 July 12 2,128 196 151 423 129 367 100 Sept. 30 2,171 197 155 410 143 328 106 Dec. 9 2,167 199 154 382 148 320 111 1893 Mar. 6 2,160 203 153 357 162 315 109 May 4 2,161 204 151 329 153 324 111 July 12 2,020 207 150 299 145 290 103 Oct. 3 1,844 238 149 277 144 347 110 Dec. 19 1,872 236 160 350 107 415 103 1894 Feb. 28 1,872 248 174 387 103 435 105 May 4 1,927 245 185 407 109 453 107 July 18 1,944 244 191 397 98 440 108 Oct. 2 2,007 240 193 399 123 404 108 Dec. 19 1,992 248 197 390 112 376 108 1895 Mar. 5 1,965 264 197 366 108 367 111 May 7 1,989 267 194 367 116 365 112 July 11 2,017 253 194 394 116 384 113 Sept. 28 2,059 251 195 377 86 341 114 Dec. 13 2,042 251 193 367 117 338 115 1896 Feb. 28 1,966 283 192 333 119 338 116 May 7 1,983 282 191 338 117 350 116 July 14 1,972 274 190 349 107 345 117 Oct. 6 1,893 280 189 331 109 344 117 Dec. 17 1,901 281 190 377 117 382 118 1897 Mar. 9 1,898 280 198 425 105 421 118 May 14 1,934 279 203 429 116 411 120 July 23 1,978 279 205 446 122 414 119 Oct. 5 2,067 277 209 494 148 390 120 Dec. 15 2,100 301 218 526 152 411 120 MITCHELL: BUSINESS CYCLES 335 TABLE 85— (Continued) Condensed Abstract of the Resources and Liabilities of All National Banks as Shown by Their Reports TO THE Comptroller of the Currency Actual amounts in millions of dollars Loans, U.S. Other bonds, Due from Checks and Date etc. bonds securities, etc. banks exchanges Cash Miscellaneous 1898 Feb. 18 2,152 278 230 579 145 442 120 May 5 2,110 279 236 499 164 461 120 July 14 2,164 304 251 524 132 472 130 Sept. 20 2,173 358 255 525 147 422 124 Dee. 1 2,237 383 259 609 236 465 123 1899 Feb. 4 2,318 368 277 695 114 509 122 Apr. 5 2,421 364 300 684 252 495 122 June 30 2,508 346 305 687 248 493 121 Sept. 7 2,516 348 320 686 192 468 121 Beo. 2 2,514 351 325 604 129 431 121 1900 Feb. 13 2,505 383 331 630 228 478 120 Apr. 26 2,585 410 337 664 188 505 123 June 29 2,644 418 357 691 205 504 125 Sept. 5 2,710 419 367 736 170 522 125 Dec. 13 2,748 427 373 736 228 503 127 1901 Feb. 5 2,851 439 391 791 282 554 127 Apr. 24 2,940 445 421 808 338 551 129 July 15 2,981 451 435 788 351 542 128 Sept. 30 3,052 454 449 785 287 541 128 Dec. 10 3,081 453 452 784 301 538 113 1902 Feb. 25 3,161 456 459 835 241 563 129 Apr. 30 3,200 456 467 807 342 560 131 July 16 3,247 460 485 819 296 571 132 Sept. 15 3,314 469 493 820 375 509 133 Nov. 25 3,347 492 512 801 281 535 136 1903 Feb. 6 3,387 500 529 844 262 572 141 Apr. 9 3,433 503 535 813 249 538 143 June 9 3,442 527 539 802 277 554 146 Sept. 9 3,508 537 541 820 198 556 150 Nov. 17 3,476 543 545 834 229 522 152 1904 Jan. 22 3,511 555 558 893 286 616 157 Mar. 28 3,576 554 581 888 231 619 157 June 9 3,622 554 577 ■880 201 660 162 Sept. 6 3,758 556 601 962 271 663 164 Nov. 10 3,828 565 602 993 399 644 167 1905 Jan. 11 3,772 567 611 922 332 672 172 Mar. 14 3,888 569 647 1,047 340 643 174 May 29 3,929 562 677 1,007 325 651 176 Aug. 25 4,028 566 673 1,040 317 667 180 Nov. 9 4,071 575 666 1,043 400 624 185 336 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 85— (Continued) Condensed Abstract or the Resources and Liabilities op All National Banks as Shown by Their Reports TO THE Comptroller or the Currency Actual amounts in millions of dollars Date 1906 Jan. 29 Loans, etc. 4,118 U.S. bonds 586 Other bonds, securities, etc. 660 Due from banks 1,065 Checks and exchanges 482 Cash 670 Miscellaneous 189 Apr. 6 4,176 593 676 1,036 377 623 189 June 18 4,237 605 679 1,046 373 653 192 Sept. 4 4,331 642 688 1,074 460 628 193 Nov. 12 4,420 654 724 1,140 443 637 197 1907 Jan. 26 4,505 660 736 1,166 186 698 204 Mar. 22 4,573 666 745 1,121 319 658 206 May 20 4,664 671 774 1,130 334 694 209 Aug. 22 4,709 675 769 1,072 249 704 213 Dec. 3 4,623 713 890 925 311 663 282 1908 Feb. 14 4,452 743 887 1,035 259 791 230 May 14 4,551 734 855 1,062 295 864 233 July 15 4,640 733 840 1,104 309 852 236 Sept. 23 4,782 733 858 1,203 340 871 240 Nov. 27 4,879 719 855 1,251 401 847 244 1909 Feb. 5 4,870 737 879 1,282 342 863 248 Apr. 28 4,988 740 889 1,233 384 881 254 June 23 5,061 744 904 1,243 373 889 257 Sept. 1 5,158 746 916 1,227 408 857 261 Nov. 16 5,191 746 886 1,285 411 808 265 1910 Jan. 31 5,264 747 857 1,264 492 836 271 Mar. 29 5,464 748 856 1,285 378 838 273 June 30 5,456 749 863 1,202 525 824 279 Sept. 1 5,497 751 865 1,215 366 855 278 Nov. 10 5,498 751 867 1,317 420 819 284 1911 Jan. 7 5,443 752 894 1,351 250 839 291 Mar. 7 5,588 752 937 1,439 325 911 289 June 7 5,634 755 1,008 1,377 366 949 294 Sept. 1 5,690 775 1,034 1,306 376 899 299 Dec. 5 5,695 781 1,052 1,405 345 866 299 Date 1890 Feb. 28 Capital, etc. 916 Circulation 124 Individual deposits 1,482 U.S. deposits 32 Bank deposits Miscellaneous 434 14 Total 3,003 May 17 936 126 1,482 31 414 21 3,010 July 18 934 126 1,525 31 424 22 3,062 Oct. 2 961 123 1,568 29 426 34 3,141 Dec. 19 985 123 1,486 29 375 49 3,047 1891 Feb. 26 979 123 1,484 29 423 26 3,065 May 4 992 123 1,578 29 420 25 3,167 July 9 987 124 1,540 26 408 28 3,113 Sept. 25 1,009 131 1,589 20 431 33 3,213 Dec. 2 1,013 135 1,604 18 442 26 3,238 MITCHELL: BUSINESS CYCLES 337 TABLE. 85— (Continued) Condensed Abstract of the Resources and Liabilities of All National Banks as Shown by Their Reports TO THE Comptroller op the Currency Date 1892 Mar. 1 Capital, etc. 1,011 Actual amounts in millions of dollars Individual U. S. Circulation deposits deposits 138 1,703 17 Bank deposits 555 Miscellaneous 13 Total 3,437 May- 17 1,020 140 1,746 16 543 14 3,479 July 12 1,011 141 1,757 14 556 14 3,494 Sept. 30 1,027 143 1,769 14 531 26 3,510 Dee. 29 1,045 146 1,765 14 484 27 3,480 1893 Mar. 6 1,038 149 1,752 14 472 35 3,460 May 4 1,041 152 1,753 14 429 44 3,432 July 12 1,039 155 1,561 14 365 90 3,213 Oct. 3 1,029 183 1,454 14 349 80 3,110 Dec. 19 1,029 180 1,540 14 450 29 3,242 1894 Feb. 28 1,012 174 1,589 14 517 19 3,325 May 4 1,012 173 1,673 14 542 20 3,433 July 18 1,001 172 1,681 14 534 21 3,422 Oct. 2 1,003 172 1,731 14 527 27 3,474 Dee. 19 1,007 169 1,696 14 515 21 3,423 1895 Mar. 5 992 170 1,669 28 495 24 3,379 May 7 993 176 1,693 27 494 28 3,410 July 11 987 179 1,739 13 527 26 3,471 Sept. 28 994 182 1,704 14 495 35 3,424 Dee. 13 998 185 1,722 14 470 35 3,424 1896 Feb. 28 988 187 1,649 34 448 41 3,348 May 7 989 197 1,690 24 443 34 3,378 July 14 983 199 1,671 15 454 31 3,354 Oct. 6 985 210 1,600 15 415 39 3,264 Dee. 17 990 211 1,641 15 486 24 3,367 1897 Mar. 9 976 203 1,670 15 563 18 3,446 May 14 972 198 1,729 16 558 19 3,492 July 23 962 196 1,772 16 597 19 3,563 Oct. 5 966 199 1,855 16 646 23 3,705 Dec. 15 971 194 1,918 44 678 25 3,829 1898 Feb. 18 964 184 1,984 31 765 19 3,947 May 5 962 188 2,001 27 670 21 3,870 July 14 955 190 2,026 53 720 34 3,978 Sept. 20 962 195 2,032 75 698 41 4,004 Dec. 1 962 207 2,226 94 795 29 4,313 1899 Feb. 4 943 204 2,233 87 913 25 4,404 Apr. 5 947 204 2,439 87 932 30 4,639 June 30 947 199 2,530 76 932 24 4,709 Sept. 7 956 200 2,452 79 929 34 4,650 Dee. 3 971 305 2,382 80 796 41 4,475 338 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA TABLE 85— {Continued) Condensed Abstract of the Resources and Liabilities op All National Banks as Shown by Their Eeports TO the Comptroller or the Currency Actual amounts in millions of dollars Date 1900 Feb. 13 Capital, etc. 977 Circulation 205 Individual deposits 2,483 U.S. deposits 109 Bank deposits 856 Miscellaneous 45 Total 4,675 Apr. 26 1,001 236 2,450 109 975 40 4,812 June 29 1,013 265 2,460 99 1,063 44 4,944 Sept. 5 1,020 284 2,509 94 1,097 45 5,048 Dec. 13 1,036 299 2,625 94 1,045 43 5,142 1901 Feb. 5 1,035 309 2,755 95 1,205- 37 5,436 Apr. 24 1,057 317 2,895 96 1,227 39 5,631 July 5 1,062 819 2,945 99 1,207 44 5,676 Sept. 30 1,086 324 2,942 107 1,185 52 5,695 Dec. 10 1,114 319 2,965 110 1,169 45 5,723 1902 Feb. 25 1,117 314 2,983 112 1,279 37 5,843 Apr. 30 1,132 310 3,114 120 1,249 38 5,962 July 16 1,185 309 3,101 124 1,243 47 6,009 Sept. 15 1,201 318 3,210 124 1,200 60 6,114 Nov. 25 1,232 337 3,154 147 1,155 80 6,104 1903 Feb. 6 1,249 335 3,161 148 1,272 70 6,235 Apr. 9 1,266 335 3,169 148 1,218 76 6,213 June 9 1,285 359 3,203 147 1,212 80 6,287 Sept. 9 1,310 375 3,157 150 1,226 92 6,310 Nov. 17 1,324 376 3,177 163 1,164 99 6,302 1904 Jan. 22 1,329 381 3,303 163 1,323 78 6,577 Mar. 28 1,341 386 3,255 160 1,383 81 6,606 June .9 1,349 400 3,313 110 1,412 71 6,656 Sept. 6 1,354 411 3,459 111 1,561 79 6,975 Nov. 10 1,372 419 3,709 110 1,513 74 7,197 1905 Jan. 11 1,368 424 3,615 106 1,535 69 7,118 Mar. 14 1,386 431 3,778 93 1,556 64 7,308 May 29 1,407 445 3,785 75 1,547 68 7,328 Aug. 25 1,420 469 3,822 62 1,625 75 7,472 Nov. 9 1,441 486 3,992 61 1,504 80 7,563 1906 Jan. 29 1,451 498 4,090 62 1,596 72 7,770 Apr. 6 1,470 506 3,980 74 1,557 83 7,671 June 18 1,491 511 4,058 90 1,545 89 7,784 Sept. 4 1,506 518 4,201 108 1,589 94 8,016 Nov. 12 1,536 536 4,291 140 1,600 111 8,214 1907 Jan. 26 1,552 545 4,118 157 1,677 105 8,155 Mar. 22 1,579 543 4,271 153 1,637 104 8,288 May 20 1,604 548 4,324 181 1,686 134 8,477 Aug. 22 1,631 552 4,320 161 1,595 130 8,390 Dec. 3 1,652 602 4,178 235 1,388 353 8,408 MITCHELL: BUSINESS CYCLES 339 TABLE 85— (Concluded) Condensed Abstract of the Eesources and Liabilities op All National Banks as Shown by Their Reports TO THE Comptroller op the Currency Date 1908 Feb. 14 Capital, etc. 1,649 Actual amounts in millions of dollars Individual U. S. Circulation deposits deposits 628 ■ 4,107 233 Bank deposits 1,584 Miscellaneous 197 Total 8,397 May 14 1,671 614 4,314 182 1,692 122 8,595 July 15 1,668 614 4,378 130 1,823 102 8,714 Sept. 23 1,689 614 4,549 126 1,942 107 9,027 Nov. 27 l,7t)0 599 4,721 124 1,959 93 9,197 1909 Feb. 5 1,70( 615 4,701 100 2,035 69 9,221 Apr. 28 1,729 636 4,827 70 2,037 69 9,369 June 23 1,744 641 4,900 74 2,035 77 9,472 Sept. 1 1,746 658 5,012 49 2,019 90 9,574 Nov. 16 1,780 668 5,122 49 1,886 86 9,591 1910 Jan. 31 1,779 668 5,194 48 1,967 75 9,731 Mar. 29 1,825 669 5,229 48 1,988 82 9,842 June 30 1,851 676 5,302 55 1,900 113 9,897 Sept. 1 1,877 675 5,147 50 1,944 134 9,826 Nov. 10 1,900 680 5,306 48 1,906 115 9,956 1911 Jan. 7 1,892 684 5,119 47 1,991 87 9,820 Mar. 7 1,910 681 5,306 46 2,224 74 10,241 June 7 1,933 682 5,480 ' 49 2,147 92 10,383 Sept. 1 1,930 697 5,492 48 2,088 124 10,379 Bee. 5 1,958 703 5,537 53 2,085 107 10,443 The circulation of the national banks as a whole has adapted itself to changing conditions of business scarcely better than has the circulation of the New York banks. The volume has expanded tardily during crises, contracted slowly during depressions, expanded again when business revived, and con- tinued to expand through periods of marked prosperity. In the latter respect, alone, has the total note issue of all national banks proved itself more elastic than that of the metropolitan group. But these movements have all been slug- gish and generally of small amplitude. Occasionally, the circulation has even expanded when the volume of business Avas shrinking, as in 1895 and 1910, when premature revivals of activity were checked. Moreover, the movements which harmonize with the changing phases of business cycles appear as minor varia- tions of long-period shiftings controlled by factors which do not grow out of the business situation. For example, as a whole 1890-96 was a time of business stress, and yet the general level of the circulation rose ; as a whole 1896-98 was a time of business improvement, and yet the general level of the circulation fell ; finally, the marked rise of the circulation after 1900 was due more to the 340 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA provisions of the Gold Standard Act, the policy of Secretary Shaw, and the fall in the prices of government bonds, than to the expansion of American business/ National-bank loans behave in a more regular fashion than New York loans. They invariably fall during crises, and rise "promptly in the following depres- sions, though a year or more sometunes elaj^ses before they reach the ante- crisis level. When business revives, the rise continues at an accelerated pace, and, save for seasonal variations, this rise runs on through the years of pros- perity until another crisis comes. In the New York bank statements securit}^ holdings are included with loans ; in the national-bank reports the two items are segregated. One might expect that in the stress of a crisis the banks ^^'ould sell part of their miscellaneous stocks and bonds in order to reduce deposit liabilities, to obtain cash, or to buy TABLE 86 Annual Averages or the Chiee Items in the Eeports or the National Banks, 1890-1911 Year 1890 Loans, etc. 1,920 Actual amounts in ; U. S. Other bonds, bonds securities, etc. 190 117 millions of dollars Due from Checks and banks exchanges 323 128 Cash 279 Miscellaneous resources 94 1891 1,974 188 124 331 139 305 99 1892 2,127 197 148 409 145 349 105 1893 2,011 218 153 322 142 338 107 1894 1,948 245 188 396 109 422 107 1895 2,014 257 195 374 109 359 113 1896 1,943 280 190 346 114 352 117 1897 1,995 283 207 464 129 409 119 1898 2,167 320 246 547 165 452 123 1899 2,455 355 305 671 187 479 121 1900 2,638 411 353 691 204 502 124 1901 2,981 448 430 791 312 545 125 1902 3,254 467 483 816 307 548 132 1903 3,449 522 538 823 243 548 146 1904 3,659 557 584 923 278 640 161 1905 3,940 568 655 1,026 343 651 177 1906 4,256 616 685 1,072 427 642 192 1907 4,615 677 783 1,083 280 683 223 1908 4,661 732 859 1,131 321 845 237 1909 5,054 743 895 1,254 384 860 257 1910 5,436 749 862 1,257 436 834 277 1911 5,610 763 985 1,376 332 893 294 Averages 1890-99 2,055.4 253.3 187.3 418.3 136.7 374.4 110.5 1900-09 3,850.7 574.1 626.5 961.0 309.9 646.4 177.4 ' Compare Chapter VI, iii. MITCHELL: BUSINESS CYCLES 341 TABLE 86~{ConUnued) Annual Averages of the Chief Items in the Reports op the National Banks, 1890-1911 Actual amounts in millions of dollars Total Tear Capital, etc. Circulation Individual deposits U.S. deposits Bank deposits Miscellaneous liabilities resources and liabilities 1890 946 124 1,509 30 415 28 3,053 1891 996 127 1,559 24 425 28 3,159 1892 1,023 142 1,748 15 534 19 3,480 1893 1,033 164 1,612 14 413 56 3,291 1894 1,007' 172 1,674 14 527 22 3,415 1895 993 178 1,705 19 496 30 3,422 1896 987 201 1,650 21 449 34 3,342 1897 969 198 1,789 21 608 21 3,607 1898 961 193 2,054 56 730 29 4,022 1899 953 202 2,407 82 900 31 4,575 1900 1,009 258 2,505 101 1,007 43 4,924 1901 1,071 318 2,900 101 1,199 43 5,632 1902 1,173 318 3,112 125 1,225 52 6,006 1903 1,287 356 3,173 151 1,218 83 6,269 1904 1,349 399 3,408 131 1,438 77 6,802 1905 1,404 451 3,799 79 1,553 71 7,358 1906 1,491 514 4,124 95 1,577 90 7,891 1907 1,604 558 4,242 177 1,597 165 8,344 1908 1,675 614 4,414 159 1,800 124 8,786 1909 1,740 644 4,912 68 2,002 78 9,445 1910 1,846 674 5,236 50 1,941 104 9,850 1911 1,925 689 5,387 49 2,107 97 10,253 Averages 1890-99 986.8 170.1 1,770.7 29.6 549.7 29.8 3,536.6 1900-09 1,380.3 443.0 3,658.9 118.7 1,461.6 82.6 7,145.7 342 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 86— (Continued) Annual Averages of the Chief Items in the Eepoets of the National Banks, 1890-1911 Relative amounts. Average actual amounts in 1890-99 = 100 Year 1890 Loans, etc. 93 U.S. bonds 75 Other bonds, securities, etc. 62 Due from banks 77 Checks and exchanges 94 Cash 75 Miscellaneous resources 85 1891 96 74 66 79 102 81 90 1892 103 78 79 98 106 93 95 1893 98 86 82 77 104 90 97 1894 95 97 100 95 80 113 97 1895 98 101 104 89 80 96 102 1896 95 111 101 83 83 94 106 1897 97 112 111 111 94 109 108 1898 105 126 131 131 121 121 111 1899 119 140 163 160 137 128 109 1900 128 162 188 165 149 134 112 1901 145 177 230 189 228 146 113 1902 158 184 258 195 225 146 119 1903 168 206 287 197 178 146 132 1904 178 220 312 221 203 171 146 1905 192 224 350 245 251 i74 160 1906 207 243 366 256 312 171 174 1907 225 267 418 259 205 182 202 1908 227 289 459 270 235 226 214 1909 246 293 478 300 281 230 233 1910 264 296 460 301 319 223 251 1911 273 301 526 329 243 238 266 Averages 1890-99 100 100 100 100 100 100 100 1900-09 187 227 334 230 227 173 161 MITCHELL: BUSINESS CYCLES 343 TABLE 86~{Concluded) Annual Averages of the Chief Items in the Eeports of the National Banks, 1890-1911 "Relative amounts. Average actual amounts in 1890-99 : Total Year Capital, etc. Circulation Individual deposits U.S. deposits Bank deposits Miscellaneous liabilities resources and liabilities 1890 96 73 85 101 75 94 .86 1891 101 75 88 81 77 94 89 1892 104 83 99 51 97 64 98 1893 105 96 91 47 75 188 93 1894 102 101 95 ._47 96 74 97 1895 101 105 96 64 90 101 97 1896 100 118 93 71 82 114 95 1897 98 116 101 71 111 70 102 1898 97 113 116 189 133 97 114 1899 97 119 136 277 164 104 129 1900 102 152 141 341 183 144 139 1901 109 187 164 341 218 144 159 1902 119 187 176 422 223 174 170 1903 130 209 179 510 222 279 177 1904 137 235 192 443 262 258 192 1905 142 265 215 267 283 238 208 1906 151 302 233 321 287 302 223 1907 163 328 240 598 291 554 236 1908 170 361 249 537 327 416 248 1909 176 279 277 230 364 262 267 1910 187 396 296 169 353 349 279 1911 195 405 304 166 383 325 290 Averages ] 890-99 100 100 100 100 100 100 100 1900-09 140 260 207 401 266 277 202 344 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA / Chart 55. / / Relative Amounts of the Loans , Individual Deposits , / 1 280 AND Cash Reserves of the National Banks- — 1890 - 1910. 1 / / / / 260 / ; 1 — — — — Individual Deposits. • ..•••.•••• r^E^M Rp«rB\/r 4 1 ■ >>••••■■•* \jf ion i^^o^r^ V ^ a / 1 > ' 1 / / 240 240 / / / / / / / / / Jy' \ / ^ ". / / : 220 220 / / I / ! / / 1 / ' 1 200 / / / 200 1 1 / ' 1 / J 1 / • 1 / 180 1 1 i 180 X f f ^ / » / / .-• / / / ,•• '■"v / i f • ! / / * i ' / ; 160 1 j f 1 '/ leo ! I ' / ' / .* ' / * 1 ' / .' ; / / /••■ ' .'/I 140 1 1 J* 140 ^ > / •7 1 / 1 '* J 1 I- y J / 120 *i / 120 r // 1 \ I 'hi ! \ . ' 1 •. / 1 J / V r \ ; f / 100 / x *. ,' / 100 ^ $ ^ =^ // N y ■ / ^ 80 ,' 80 1890 31 92 '9S '94 '95 '96 '97 '98 'SB 1900 'oi 02 Oi 04 '05 '06 07 '08 '09 1910 MITCHELL: BUSINESS CYCLES 345 United States bonds as a basis for additional circulation. In fact, however, they have made but little use of their "other securities" for such purposes. In the crises of 1893 and 1896 this item did fall a trifle ; but in the crises of 1890, 1899, 1903, and 1907 it rose, slightly on the first three occasions, heavily on the last. Apparently the banks are unwilling to sacrifice securities at the low prices which prevail on the stock market in times of crisis, and are often compelled to take over additional stocks or bonds from embarrassed debtors. Such holdings, in America at least, cannot be regarded as an efficient "second reserve" for meeting seasons of stress. What service they render in this regard seems to be limited to their use as a basis for clearing-house loan certificates. As soon as a crisis is over and the inflow of cash begins, the banks buy additional securities at the same time that they are expanding loans. The one exception to this rule occurred during the depression of 1908. But this exception is more apparent than real. Between August and December, 1907, the banks had been forced to take over some $121,000,000 of additional securities other than government bonds. When the crisis was passed, they gradually disposed of part of these extraordinarily large holdings; but continued to carry some $50,000,000 more than before the crisis. Periods of business revival and of prosperity have usually been accompanied by further increases of security holdings, particularly when the banks have been participating actively in syndicates for underwriting new issues. Thus, in the period of company promotion between 1898 and 1902, "other securities" was the only item among national-bank resources to double its amount — and more. It is, indeed, one of the salient features of the national-banking business since 1890 that the banks have put a gradually decreasing proportion of their funds available for productive investment into commercial loans, and an increasing proportion into stocks and bonds. The next table traces this change in detail. Whereas loans used to make about 86 per cent of the combined loans. United States bonds, and other securities, they made in 1910 but 77 per cent. Other securities meanwhile have risen from about 5 to about 12 per cent of the total, and United States bonds from 9 to 10.5 per cent. The proportion of other securities reached its maximmn of 14.6 per cent and that of loans its minimum of 73.2 per cent immediately after the crisis of 1907. Individual deposits in the national banks fall during crises, rise during depressions, and continue their upward course during periods of revival and prosperity. In all this they resemble loans ; but, as in ISTew York, the amplitude of the two sets of variations differs from phase to phase of the cycle. The fall of deposits exceeds that of loans in crises, and their rise exceeds that of loans during depressions. On the other hand, during periods of revival and prosperity the increase of deposits usually lags behind that of loans. 346 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 87 Loans and Security Holdings op the National Banks at the Date of Each Report to the "Comptroller of THE Currency, 1890-1911 1890 1891 1892 1893 1894 1895 1896 1897 1898 Loans and security holdings in millions of dollars Proportion of i ts Date Loans and security holdings in millions of dollars Proportion LOf Date Loans Per cent U.S. bonds Per cent Other bondi and securitie Per cent Loans Per cent U. S. bonds Per cent Other bonds and securities Per cent Feb. 28 2,157 85.6 9.0 5.4 1898 July 14 2,719 79.6 11.2 9.2 May 17 2,215 86.0 8.7 5.3 Sept. 20 2,786 78.0 12.8 9.2 July 18 2,244 86.2 8.6 5.2 Dee. 1 2,879 77.7 13.3 9.0 Oct. 2 2,287 86.8 8.1 5.1 1899 Feb. 4 2,963 78.2 12.4 9.4 Dec. 19 2,233 86.5 8.3 5.2 Apr. 5 3,085 78.5 11.8 9.7 Feb. 26 2,235 86.3 8.3 5.4 June 30 3,159 79.4 10.9 9.7 May 4 2,279 86.4 8.2 5.4 Sept. 7 3,184 79.0 10.9 10.1 July 9 2,273 86.4 8.2 5.4 Dec. 2 3,190 78.8 11.0 10.2 Sept. 25 2,320 86.4 8.2 5.4 1900 Feb. 13 3,219 77.8 11.9 10.3 Dec. 2 2,321 86.2 8.3 5.5 Apr. 26 3,332 77.6 12.3 10.1 Mar. 1 2,392 86.1 8.1 5.8 June 29 3,419 77.4 12.2 10.4 May 17 2,449 86.1 8.0 5.9 Sept. 5 3.496 77.5 12.0 10.5 July 12 2,475 86.0 7.9 6.1 Dee. 13 3,548 77.5 12.0 10.5 Sept. 30 2,523 86.1 7.8 6.1 1901 Feb. 5 3,681 77.5 11.9 10.6 Dee. 9 2,520 86.0 7.9 6.1 Apr. 24 3,806 77.2 11.7 11.1 Mar. 6 2,516 85.8 8.1 6.1 July 15 3,867 77.1 11.7 11.2 May 4 2,516 85.9 8.1 6.0 Sept. 30 3,955 77.1 11.5 11.4 July 12 2,377 85.0 8.7 6.3 Dec. 10 3,986 77.3 11.4 11.3 Oct. 3 2,231 82.6 10.7 6.7 1902 Feb. 25 4,076 77.5 11.2 11.3 Dee. 19 2,268 82.5 10.4 7.1 Apr. 30 4.123 77.6 11.1 11.3 Feb. 28 2,294 81.6 10.8 7.6 July 16 4,192 77.4 11.0 11.6 May 4 2,357 81.8 10.4 7.8 Sept. 15 4,276 77.5 11.0 11.5 July 18 2,379 81.7 10.3 8.0 Nov. 25 4,351 76.9 11.3 11.8 Oct. 2 2,440 82.3 9.8 7.9 1903 Feb. 6 4,416 76.7 11.3 12.0 Dec. 19 2,437 81.7 10.2 8.1 Apr. 9 4,471 76.8 11.2 12.0 Mar. 5 2,426 81.0 10.9 8.1 June 9 4,508 76.4 11.7 11.9 May 7 2,450 81.2 10.9 7.9 Sept. 9 4,586 76.5 11.7 11.8 July 11 2,464 81. S 10.3 7.9 Nov. 17 4,564 76.2 11.9 11.9 Sept. 28 2,505 82.2 10.0 7.8 1904 Jan. 22 4,624 75.9 12.0 12.1 Dee. 13 2,486 82.1 10.1 7.8 Mar. 28 4,711 75.9 11.8 12.3 Feb. 28 2,441 80.5 11.6 7.9 June 9 4,753 76.2 11.7 12.1 May 7 2,456 80.7 11.5 7.8 Sept. 6 4,915 76.5 11.3 12.2 July 14 2,436 81.0 11.2 7.8 Nov. 10 4,995 76.6 11.3 12.1 Oct. 6 2,362 80.1 11.9 8.0 1905 Jan. 11 4,950 76.2 11.5 12.3 Dee. 17 2,372 80.2 11.8 8.0 Mar. 14 5,104 76.2 11.1 12.7 Mar. 9 2,376 79.9 11.8 8.3 May 29 5,168 76.0 10.9 13.1 May 14 2,416 80.1 11.5 8.4 Aug. 25 5,267 76.5 10.7 12.8 July 23 2,462 80.4 11.3 8.3 Nov. 9 5,312 76.6 10.8 12.6 Oct. 5 2,553 81.0 10.8 8.2 1906 Jan. 29 5,364 76.8 10.9 12.3 Dec. 15 2,619 80.2 11.5 8.3 Apr. 6 5,445 76.7 10.9 12.4 Feb. 18 2,660 80.9 10.5 8.6 June 18 5,521 76.7 11.0 12.3 May 5 2,625 80.4 10.6 9.0 Sept. 4 5,661 76.5 11.3 12.2 MITCHELL: BUSINESS CYCLES 347 Loans and Security Holdings of TABLE 87— (Concluded) THE National Banks at the Date of Each Report to the Comptroller of the Currency, 1890-1911 Se 12 Loans and security holdings in millions of dollars 5,798 Eroportion of s 1909 Date June 23 Loans and security holdings in millions of dollars 6,709 Proportion of 1906 Nov. Loans Per cent 76.2 U.S. bonds Per cent 11.3 Other bonds and securities Per cent 12.5 Loans Per cent 75.4 U.S. bonds Per cent 11.1 Other bonds and securities Per cent 13.5 1907 Jan. 26 5,901 76.3 11.2 12.5 Sept. 1 6,820 75.6 11.0 13.4 Mar. 22 5,984 76.4 11.1 12.5 Nov. 16 6,823 76.1 10.9 13.0 May 20 6,109 76.3 11.0 12.7 1910 Jan. 31 6,868 76.6 10.9 12.5 Aug. 22 6,153 76.5 11.0 12.5 Mar. 29 7,068 77.3 10.6 12.1 Dec. 3 6,226 74.3 11.4 14.3 June 30 7,068 77.2 10.6 12.2 1908 Feb. 14 6,082 73.2 12.2 14.6 Sept. 1 7,113 77.3 10.5 12.2 May- 14 6,140 74.1 12.0 13.9 Nov. 10 7,116 77.3 10.5 12.2 July 15 6,213 74.7 11.8 13.5 1911 Jan. 7 7,089 76.8 10.6 12.6 Sept. 23 6,373 75.0 11.5 13.5 Mar. 7 7,277 76.8 10.3 12.9 Nov. 27 6,453 75.6 11.1 13.3 June 7 7,397 76.2 10.2 13.6 1909 Eeb. 5 6,486 75.1 11.4 13.5 Sept. 1 7,499 75.9 10.3 13.8 Apr. 28 6,617 75.4 11.2 13.4 Dec. 5 7,528 75.6 10.4 14.0 Consequently, the ratio of loans to deposits always rises during crises, and always sinks during depression. (See Table 88.) With less regularity the ratio I'ises again on the revival of activity, or at least when the revival, develops into prosperity. The latter movement, however, is sometimes obscured, as in 1897-99, by the change pointed out below in the relation between capital and total liabilities. The national bank reports are not made at sufficiently brief intervals to establish the priority of the changes in deposits and loans ; but when a difference does appear, deposits are the first to fall in crises and the first to rise in depressions. Deposits made by banks follow in general the same course as individual deposits. Their changes are almost always greater in proportion and sometimes greater in actual amount than those of individual deposits — for example, in the crisis of 1907 and the depression of 1908. The bank deposits have also made much the more rapid growth over the whole period covered by the tables. Cash, like deposits, invariably declines in crises and rises early in depressions. During periods of revival and prosperity its fluctuations are less regular. The reviving activity of trade leads to considerable withdrawals of cash, particularly when this revival coincides, as frequently happens, with the regular autumnal demand for money to move the crops. But sometimes an inflowing current of gold enables the banks to maintain their reserves unimpaired, or even to increase them, despite a rapid expansion in the amount of money carried in the pockets of individuals and the tills of business enterprises. 348 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA 136 134 152 Chart ,Sfi Ratio of the Loans to the Net Deposits IN THE National Banks. 1 1890 - 1910 . 130 128 i IJ6 124 1 126 / 122 u ( ll 1 1 , 1 1 14 1 12 y 1 12 \ 110 108 106 104 102 100 98 9« 94 ' 106 104 ll / » A /I ^ A r too f J /I I t 7' 1 / 38 J 7' / 'Jl i , / 36 I / / 94 J 1890 '9l '92 "95 '94 '95 '96 'S\ '9a '99 1900 Ol "02 '03 '04- '05 '06 '07 '06 "09 I9I0 'll MITCHELL: BUSINESS CYCLES 349 TABLE 88 Ratio to the Net Deposits or National Banks op Their Loans and of Their Loans Plus Security Holdings AT the Date or Each Report to the Comptroller of the Currency, 1890-1911 Katio to net deposits of Date Loans Loans and securities 1890 Feb. 28 128.5 150.2 May 17 129.8 151.0 July 18 128.8 149.5 Oct. 2 131.0 150.8 Dec 19 134.3 155.3 1891 Feb. 26 130.6 151.4 May 4 130.2 150.6 July 9 129.9 150.3 Sept. 25 131.4 152.0 Dec. 2 129.4 150.1 1892 Mar. 1 123.2 143.1 May 17 121.1 140.7 July 12 120.8 140.5 Sept. 30 124.3 144.4 Deo. 9 126.1 146.6 1893 Mar. 6 126.7 147.5 May 4 127.1 148.0 July 12 136.3 160.4 Oct. 3 133.4 161.4 Dec. 19 122.1 147.9 1894 Feb. 28 115.8 141.9 May 4 113.4 138.7 July 18 113.0 138.3 Oct. 2 115.6 140.5 Dec. 19 116.6 142.6 1895 Mar. 5 116.3 143.5 May 7 116.7 143.8 July 11 114.9 140.3 Sept. 28 118.6 144.3 Dec. 13 119.5 145.5 1896 Feb. 28 119.5 148.4 May 7 118.2 146.4 July 14 118.1 145.9 Oct. 6 120.2 150.0 Dec. 17 116.4 145.2 1897 Mar. 9 111.4 139.5 May 14 111.0 138.7 July 23 109.8 136.7 Oct. 5 11L2 137.3 Dee. 15 109.5 136.5 1898 Feb. 18 106.3 131.4 May 5 105.1 130.7 Ratio to net deposits of Date Loans Loans and securities 1898 July 14 103.5 130.1 Sept. 20 105.6 135.3 Dec. 1 102.8 132.3 1899 Feb. 4 99.2 126.8 Apr. 5 99.4 126.7 June 30 99.3 125.0 Sept. 7 100.5 127.2 Dec. 2 102.8 130.5 1900 Feb. 13 101,0 129.7 Apr. 26 100.5 129.5 June 29 100.6 130.1 Sept. 5 100.4 129.5 Dec. 13 101.5 131.1 1901 Feb. 5 98.8 127.5 Apr. 24 98.8 127.9 July 15 98.9 128.3 Sept. 30 99.9 129.5 Dec. 10 101.0 130.7 1902 Feb. 25 99.2 127.9 Apr. 30 99.6 128.3 July 16 100.6 129.8 Sept. 15 103.1 133.0 Nov. 25 103.7 134.8 1903 Feb. 6 101.8 132.7 Apr. 9 103.2 134.5 June 9 103.2 135.1 Sept. 9 104.2 136.3 Nov. 17 106.0 139.2 1904 Jan. 22 101.9 134.2 Mar. 28 101.6 133.9 June 9 99.4 130.4 Sept. 6 99.2 129.8 Nov. 10 100.0 130.4 1905 Jan. 11 98.6 129.4 Mar. 14 98.5 129.3 May 29 98.2 129.2 Aug. 25 98.5 128.8 Nov. 9 100.4 131.1 1906 Jan. 29 99.5 129.6 Apr. 6 101.3 132.0 June 18 101.3 131.9 Sept. 4 101.8 133.0 350 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 88— (Concluded) Ratio to the Net Deposits of National Banks of Their Loans and of Their Loans Plus Security Holdings AT the Date of Each Report to the Comptroller of the Currency, 1890-1911 Ratio to net deposits of Ratio to net deposits of Date 1906 Nov. 12 Loans and Loans securities 102.6 134.6 1909 Date June 23 Loans 95.1 1 Loans and securities 126.1 1907 Jan. 26 101.4 132.8 Sept. 1 95.6 126.4 Mar. 22 102.3 133.9 Nov. 16 97.7 128.4 May 20 102.6 134.4 1910 Jan. 31 97.4 127.1 Aug. 22 102.5 133.9 Mar. 29 98.4 127.2 Dee. 3 106.8 143.8 June 30 99.7 129.1 1908 Feb. 14 101.2 138.3 Sept. 1 99.8 129.1 May 14 97.9 132.1 Nov. 10 100.4 129.9 July 15 96.9 129.8 1911 Jan. 7 98.8 128.7 Sept. 23 96.7 128.8 Mar. 7 96.9 126.2 Nov. 27 97.0 128.3 June 7 95.7 125.7 1909 Feb. 5 95.3 126.9 Sept. 1 96.5 127.1 Apr. 28 95.1 126.1 Dec. 5 97.0 128.2 Note. — Net deposits = individual deposits plus dividends for the clearing house, cash items, and bills of other banks all U. S. bonds held, plus premiums, "other bonds to secure unpaid and sums due to banks, minus sums due from banks, exchanges . Loans = loans and discounts plus overdrafts. Security holdings ~ U. S. deposits," and "bonds, securities, etc." Unlike the New York banks, the national banks as a whole have usually kept their ratio of reserves to net deposits unimpaired during crises, and some- times they have even increased the ratio a trifle (see Table 89). But the data from the regular reports do not necessarily show the situation at the time of most intense strain, and perhaps weekly statements covering the whole period of crises would give different results. It is clear, however, that the national banks have been even more timid than the clearing-house institutions of New York in using their reserves to restore confidence in times of panic. The prompt increase in the ratio as soon as the crisis begins to merge into depression is unmistakable. So also is the declining tendency of the ratio in times of business revival and business prosperitj^ Indeed, the ratio has usually been lower at the culmination of the "boom" times than during the crisis itself, if the avail- able data may be trusted. But the dAvindling of the ratio during prosperous times is somewhat exaggerated by the decline of the general level about which it has fluctuated. This change occurred chiefly between the beginning of 1899 and the end of 1902. Liabilities to stockholders, including capital, surplus, and undivided profits, have shown no close connection with business cycles. These items were expand- ing from 1890 until 1893. Bank failures during the panic of that year caused a decline, which continued not only through the period of depression but also MITCHELL: BUSINESS CYCLES 351 2a 26 24 22 20 IS 16 14 24 22 20 18 16 14 1 \ CHART 57. Ratio of the Cash Reserves to the Net Deposits OF THE National Banks. 1890 - 1910 . 1 \ f\ / V \ \ 1 [1 V \ \ J V [ / V \ \ V A V V 1/ ^ A/ L \ ■\ V \l \J V W\ 1890 '91 '92 '93 'BI- '95 96 '97 '98 '99 1900 '01 '02 '03 '04 '05 '06 '07 '08 '09 1910 'II TABLE 89 Ratio op the Cash Reserve of the National Banks to THE Comptroller of the Their Net Deposits at the Date or Each Report to Currency, 1890-1911 2 19 26 4 9 Date 1890 Feb. 28 May 17 July 18 Oct. Dec. 1891 Feb. May July Sept. 25 Dec. 2 - 1892 Mar. 1 May 17 July 12 Sept. 30 Deo. 9 1893 Mar. 6 May 4 July 12 Cash reserve Millions of dollars 278 275 282 283 279 303 304 '311 298 311 355 374 367 328 320 315 324 290 Net deposits Millions of dollars 1,436 1,467 1,501 1,516 1,438 1,476 1,513 1,512 1,526 1,546 1,671 1,740 1,761 1,747 1,719 1,705 1,700 1,482 Ratio Per cent 19.4 18.7 18.8 18.7 19.4 20.5 20.1 20.6 19.5 20.1 21.2 21.5 20.8 18.8 18.6 18.5 19.1 19.6 Date 1893 Oct. 3 Cash reserve Millions of dollars 347 Net deposits Millions of dollars 1,382 Ratio Per cent 25.1 Dec. 19 415 1,533 27.1 1894 Feb. 28 435 1,616 26.9 May 4 453 1,699 26.7 July 18 440 1,720 25.6 Oct. 2 404 1,736 23.3 Dec. 19 376 1,709 22.0 1-895 Mar. 5 367 1,690 21.7 May 7 365 1,704 21.4 July 11 384 1,756 21.9 Sept. 28 341 1,736 19.6 Dec. 13 338 1,708 19.8 1896 Feb. 28 338 1,645 20.5 May 7 350 1,678 20.9 July 14 345 1,669 20.7 Oct. 6 344 1,575 21.8 Dec. 17 382 1,633 23.4 1897 Mar. 9 421 1,703 24.7 352 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 89— (Concluded) Ratio of the Cash Reserve of the National Banks to Theie Net Deposits at the Date of Each Report to the (jomptroller op the currency, 1890-1911 Date 1897 May 14 Cash reserve Millions of dollars 411 Net deposits Millions of dollars 1,742 Ratio Per cent 23.6 July 23 414 1,801 23.0 Oct. 5 390 1,859 21.0 Dee. 15 411 1,918 21.4 1898 Feb. 18 442 2,025 21.8 May 5 461 2,008 23.0 July 14 472 2,090 22.6 Sept. 20 422 2,058 20.5 Dee. 1 465 2,176 21.4 1899 Feb. 4 509 2,337 21.8 Apr. 5 495 2,435 20.3 June 30 493 2,527 19.5 Sept. 7 468 2,503 18.7 Dee. 2 431 2,445 17.6 1900 Feb. 13 478 2,481 19.3 Apr.- 26 505 2,573 19.6 June 29 504 2,627 19.2 Sept. 5 522 2,700 19.3 Dee. 13 503 2,706 18.6 1901 Feb. 5 554 2,887 19.2 Apr. 24 551 2,976 18.5 July 15 542 3,014 18.0 Sept. 30 541 3,055 17.7 Dec. 10 538 3,049 17.6 1902 Feb. 25 563 3,186 17.7 Apr. 30 560 3,214 17.4 July 16 571 3,229 17.7 Sept. 15 509 3,215 15.8 Nov. 25 535 3,227 16.6 1903 Feb. 6 572 3,327 17.2 Apr. 9 538 3,325 16.2 June 9 554 3,336 16.6 Sept. 9 556 3,365 16.5 Nov. 17 522 3,278 15.9 1904 Jan. 22 616 3,447 17.9 Mar. 28 619 3,519 17.6 June 9 660 3,644 18.1 Note. — Net deposits = individual deposits plus dividends unpa changes in the clearing house, cash items, and bills of other banks. Date 1904 Sept. 6 Cash reserve Millions of dollars 663 Net deposits Millions of dollars 3,787 Ratio Per cent 17.5 Nov. 10 644 3,830 16.8 1905 Jan. 11 672 3,826 17.6 Mar. 14 643 3,947 16.3 May 29 651 4,000 16.3 Aug. 25 667 4,090 16.3 Nov. 9 624 4,053 15.4 1906 Jan. 29 670 4,139 16.2 Apr. 6 623 4,124 15.1 June 18 653 4,184 15.6 Sept. 4 628 4,256 14.8 Nov. 12 637 4,308 14.8 1907 Jan. 26 698 4,443 15.7 Mar. 22 658 4,468 14.7 May 20 694 4,546 15.3 Aug. 22 704 4,594 15.3 Dec. 3 663 4,330 15.3 1908 Feb. 14 791 4,397 18.0 May 14 864 4,649 18.6 July 15 852 4,788 17.8 Sept. 23 871 4,948 17.6 Nov. 27 847 5,028 16.8 1909 Feb. 5 863 5,112 16.9 Apr. 28 881 5,247 16.8 June 23 889 5,319 16.7 Sept. 1 857 5,396 15.9 Nov. 16 808 5,312 15.2 1910 Jan. 31 836 5,405 15.5 Mar. 29 838 5,554 15.1 June 30 824 5,475 15.1 Sept. 1 855 5,510 15.5 Nov. 10 819 5,476 15.0 1911 Jan. 7 839 5,509 15.2 Mar. 7 911 5,766 15.8 June 7 949 5,884 16.1 Sept. 1 899 5,898 15.2 Dec. 5 866 5,872 14.7 and sums due to banks, minus sums due from banks, ex- MITCHELL: BUSINESS CYCLES 353 through the revival of activity and into the good times. Then the tide turned, and since February, 1899, capital liabilities have risen with scarcely a setback through crises, bad times and good. There is, however, one little-known fact concerning the ratio between capital liabilities and total liabilities, of considerable moment for the theory of business cycles. This ratio remains remarkably stable during periods of established prosperity, crisis, and depression ; but it declines to a permanently lower level when business is recovering from a prolonged period of contraction. The next table shows that the maximmn variation in this ratio was from 32.3 to 28.4 per cent in 1890-96, and from 21.0 to 18.2 per cent in 1900-]0. But during the interval between these two periods, when business was recovering from the troubles of 1893-96, the ratio dropped from about 30 to about 20 per cent. The extreme range of the fluctuations about the 30 per cent level in 1890-96 was only 3.9 per cent, and the extreme range of the fluctuations about the 20 per cent level in 1900 to 1910 was only 2.8 per cent, much less in both cases than the 10 per cent drop from the earlier to the later level. Moreover, the lowest ratio in 1890-96 — 28.4 per cent — was much higher than the highest ratio in 1900-10 — 21.0 per cent. The cause of this striking change in the condition of the national banks can be found by analyzing the statements for, saj, October, 1896, and June, 1899. Between these dates the resources of the banks increased by more than a billion dollars. Whence did the banks get these additional funds f Not from the stockholders, for capital, surplus, and imdivided profits fell 38 millions. Not from the issue of notes, for circulation declined 11 millions. Not from the sale of bonds and stocks, for the banks bought more than they sold. Not from miscellaneous sources, for these items fell 15 millions. Solely from depositors. Individual deposits increased 930 millions, net bank deposits 161 millions, and United States deposits 61 millions — a total of 1152 millions. Of course, a large part of the increase in individual deposits was caused by an increase of loans; but the more ample reserves which enabled the banks to extend their loans and security holdings were provided by customers and not by stockholders. What happened was that, as business began to improve the public deposited enormous sums with the banks. The latter made profitable use of these funds to increase their commercial discounts (thus augmenting deposits still further), to buy more interest-bearing securities, and even to return part of the former capital, surplus, and profits to stockholders. This reduction of capital liabilities is explained by the relatively low profits mad<5 by the national banks from 1893 to 1899.' When the public had provided the funds which made an extension of business possible, despite a lower capital- ization, profits increased again, and then investors began putting more capital s Compare Chapter IX, i, below. 354 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE 90 Ratio of the Capital Liabilities to the Total Liabilities of the National Banks at the Date or Each Report to the Comptroller of the Currency, 1890-1910 Date 1890 Feb. 28 Katio at date of report 30.5 Average for the year May 17 31.1 July 18 30.5 31.0 Oct. 2 30.6 Deo. 19 32.3 1891 Feb. 26 31.9 May 4 31.3 July 9 31.7 31.5 Sept. 25 31.4 Dee. 2 31.3 1892 Mar. 1 29.4 May 17 29.3 July 12 28.9 29.4 Sept. 30 29.3 Dec. 9 30.0 1893 Mar. 6 30.0 May 4 30.4 July 12 32.0 31.4 Oct. 3 33.1 Dee. 19 31.7 1894 Feb. 28 30.4 May 4 29.4 July 18 29.2 29.5 Oct. 2 28.9 Dec. 19 29.4 1895 Mar. 5 29.4 May 7 29.1 July 11 28.4 29.0 Sept. 28 29.0 Dec. 13 29.1 1896 Feb. 28 29.5 May 7 29.3 July 14 29.3 29.5 Oct. 6 30.2 Dec. 17 29.4 1897 Mar. 9 28.3 May 14 27.8 July 23 27.0 26.9 Oct. 5 26.1 Dec. 15 25.4 1898 Feb. 18 24.4 May 5 24.9 Date 1898 July 14 Batio at date of " report 24.0 Average for the year 23.9 Sept. 20 24.0 Dec. 1 22.3 1899 Feb. 4 21.4 Apr. 5 20.4 June 30 20.1 20.8 Sept. 7 20.6 Dec. 2 21.7 1900 Feb. 13 20.9 Apr. 26 20.8 June 29 20.5 20.5 Sept. 5 20.2 Dec. 13 20.1 1901 Feb. 5 19.0 Apr. 24 18.8 July 15 18.7 19.0 Sept. 30 19.1 Dec. 10 19.5 1902 Feb. 25 19.1 Apr. 30 19.0 July 16 19.7 19.5 Sept. 15 19.6 Nov. 25 20.2 1903 Feb. 6 20.0 Apr. 9 20.4 June 9 20.5 20.5 Sept. 9 20.8 Nov. 17 21.0 1904 Jan. 22 20.2 Mar. 28 20.3 June 9 20.3 19.9 Sept. 6 19.4 Nov. 10 19.1 1905 Jan. 11 19.2 Mar. 14 19.0 May 29 19.2 19.1 Aug. 25 19.0 Nov. 9 19.1 1906 Jan. 29 18.7 Apr. 6 19.2 June 18 19.2 18.9 Sept. 4 18.8 MITCHELL: BUSINESS CYCLES 355 TABLE 90~{Concluded) Ratio of the Capital Liabilities to the Total Liabilities oe the National Banks at the Date of Each Ebpokt to the Comptkollbr op the Currency, 1890-1910 Date 1906 Nov. 12 Ratio at date of report 18.7 Average for the year 1907 Jan. 26 19.0 Mar. 22 19.1 May 20 18.9 19.2 Aug. 22 19.4 Dec. 3 19.6 1908 Feb. 14 19.6 May 14 19.4 July 15 19.1 19.1 Sept. 23 18.7 Nov. 27 18.5 1909 Feb. 5 18.4 Apr. 28 18.5 Date 1909 June 23 Ratio at date of report 18.4 Average for tlie year 18.4 Sept. 1 18.2 Nov. 16 18.6 1910 Jan. 31' 18.3 Mar. 29 18.5 June 30 18.7 18.7 Sept. 1 19.1 Nov. 10 19.1 1911 Jan. 7 19.3 Mar. 7 18.6 June 7 18.6 18.8 Sept. 1 18.6 Dee. 5 18.8 Note. — Capital liabilities includes capital, surplus, and undivided profits. 34 32 30 28 26 24 22 20 IS 30 28 26 24 22 20 18 ^ A Chart 55. Ratio of the Capital Liabilities lO the Total Liabilities OF THE National Banks> 1890 - 1910. J w l\ I A \l h V A I \ \ <-rr T^ i~^ r. • It / /'^ HA f ? -'V lOOl 5s \ \ 1/ \ h A '\ \ % UflrJ p ) ^ v/ / \ ^ r\j J \ w / H 1890 '91 "92 '93 '94- '95 '96 '97 "98 '99 1900 '01 'Oa '03 '04 '05 'OG '07 '08 '09 1910 356 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA into bank stocks. But, as the preceding ratios show, the increase of capital was only fast enough in 1900-10 to maintain the lower level of capital to total liabilities which had been reached by 1899." The differences brought out by the preceding analysis between the effect of business cycles upon the condition of the national and the New York banks are few. (1) The national banks alwaj's contract loans during crises, while the clearing-house banks of New York expanded loans in 1903 and still more in 1907. (2) The national banks seem to hoard their cash during crises more than the metropolitan institutions. (3) During periods of prosperity, the national banks expand their circulation, and (4) also their loans and deposits with greater regularity. The reason for the last-mentioned difference is that the national banks as a whole have no such intermittent competition to meet in the loan market as the New York clearing-house banks face from the out- of-town institutions, the trust companies, and the great insurance, railway, and industrial corporations. Besides these differences, the present section brings out additional infor- mation about items not adequately reported in the NeAv York bank statements. (1) Securities other than United States bonds contract less than loans in crises and someimes rise — on occasion rise with extreme rapidity. This advance usually continues through periods of depression, revival, and prosperity. (2) Bank deposits follow the same general course as individual deposits, but undergo fluctuations of greater relative amplitude. (3) The ratio of capital liabilities to total liabilities remains nearly constant during periods of pros- perity, crisis, and depression; but drops to a permanently lower level when business is recovering from a prolonged and serious period of contraction. (4) Finally, the decline in this ratio diminishes the sums banks can lend out of resources of given amount," and therefore reduces the level about which the ratio of loans to deposits fluctuates. III. The National Banks in Reserve Cities and in Rural Districts Of the five sets of reports received annually from the national banks, the Comptroller of the Currency publishes the fourth set in a form which shows the condition of the banks in central-reserve cities, reserve cities, and country towns. Statements for but one day in each year are, of course, too meagre a 8 See Wesley C. Mitchell, ' ' The Decline in the Ratio of Banking Capital to Liabilities, ' ' Quarterly Journal of Economics, August, 1909, vol. 23, pp. 697-713. This paper shows that recovery from a prolonged depression is usually, if not invariably, accompanied by a fall in the otherwise stable level about which the ratio of capital liabilities to total liabilities fluctuates. Such changes occurred among the national banks in 1878-80, as well as in 1896-99; among the state banks at the same dates; among the Canadian banks in 1868-70, 1878-81 1887- 93, and in 1896-1900; among the English joint-stock banks in 1887-88, 1894-96, and 1905-06. Concerning the recent experiences of the last group see the end of section iv, below. 10 A bank with a reserve of $100,000 provided wholly by stockholders can clearly lend larger sums than one with an equal reserve provided half by depositors, other conditions being the same. Tor the latter insti- tution must keep larger sums of cash on hand against the extra $50,000 of deposits. MITCHELL: BUSLNESS CYCLES 357 basis for investigating the influence of each phase of business cycles upon these three groups of institutions. For example, the relation of the national banks in urban and rural districts to the panic of 1907 cannot be made out by com- paring the reports for September 4, 1906, August 22, 1907, and September 23, 1908. But these reports do throw additional light upon a few matters of significance for the history of American business since 1890. Loans in the central-reserve cities — New York, Chicago, and St. Louis — exhibit the influence of business cycles in a more striking degree than do loans in country districts. Table 91 brings out this fact by means of relative figures. For example, the rural banks contracted their loans less than the city banks in 1893, expanded them less in 1894, and again contracted them less between TABLE 91 Relative Fluctuations in the Loans or National Banks in New York, the Central Eeserve Cities, the Reserve Cities, and in Other Places, According to the Fourth Report Made to the Comptroller op the Currency in the Years 1890-1911 Average actual amounts in 1890-99 : = 100 New , , , York Average actual amounts r,oK a in 1890-99 ao5-" Central reserve cities 490.8 Reserve cities 531.0 Country districts 1,050.2 All national banks 2,072.1 1890 Oct. 2 81 83 96 102 96 1891 Sept. 25 83 85 94 104 97 1892 Sept. 30 94 98 101 110 105 1893 Oct. 3 77 77 87 95 89 1894 Oct. 2 99 98 97 96 97 1895 Sept. 28 100 99 99 100 99 1896 Oct. 6 86 86 91 94 91 1897 Oct. 5 112 108 101 95 100 1898 Sept. 20 121 119 105 98 105 1899 Sept. 7 148 148 128 106 121 1900 Sept. 5 .56 156 137 116 131 1901 Sept. 30 167 174 151 133 147 1902 Sept. 15 166 179 164 149 160 1903 Sept. 9 173 184 170 162 169 1904 Sept. 6 221 222 174 166 181 1905 Aug. 25 220 228 195 178 194 1906 Sept. 4 192 207 220 204 209 1907 Aug. 22 195 216 235 229 227 1908 Sept. 23 248 253 233 219 231 1909 Sept. 1 253 266 259 236 249 1910 Sept. 1 239 260 275 263 265 1911 Sept. 1 242 269 288 271 275 Averages 1890-99 100 100 100 100 100 1900-09 199 209 194 179 190 358 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA Chart 59. i 210 260 250 240 230 RaATlVE Amounts of the Loans of the National Banks in 1 1 t ■ New York, the Reserve CrriES. and in Country Districts. 1690 - 1911. i \! 1 1 \ New Vork City. Reserve Cities. M.I 1 . 1 ' •* 1 1 J ■' 220 2J0 ^^^ 1 • /*. ; 220 210 I I \ 1 \l 1 W 200 A 200 ISO i y 190 I / / ; 180 no 160 ISO 140 I / 180 no 160 150 140 130 120 110 100 90 / [) / f / / / // 1/ / / / / / f / / / • / / 1 1 t :"' 120 110 100 90 80 ; ! J / / / / / 1 ■'"' »' \ / ■ ■«H / I // r> \ r -*'* / // \ \ 1890 91 '92 95 ^34 '95 '96 "97 '9B '99 1900 "Ol '02 '05 "04 '05 '06 "01 '08 "09 1910 MITCHELL: BUSINESS CYCLES 359 1895 and 1896. The revival of the autumn of 1904 was far less pronounced in the country than in the large cities, and so also was the business reaction of 1910. Again, the country banks were slower than the city institutions in recovering from the effects of the panic of 1907. The policy of investing a decreasing proportion of funds in commercial loans and discounts and an increasing proportion in stocks and bonds has been hardly less marked among the country than among the city banks. Table 92, which justifies this conclusion, also indicates that business depression accel- erates and business prosperity retards this change in the case of banks in reserve cities and country districts. The same can hardly be said for the institutions in New York. And even outside of New York the rule was broken in 1898-1901, when the national banks joined in the movement towards company promotion on a grand scale. TABLE 92 s AND Securities OP THE National Banks in New York City , the Central Eesebve Cities, the Reserve :ties, and Country Districts AT THE Date of the Eeport Nearest October 1, in Each Year, 1890-1911 New York City Central reserve cities Date Loans and securities in millions of dollars Loans Per cent U. S. bonds Per cent Other bonds and securities Per cent Loans and securities in millions of dollars Loans Per cent U.S. bonds Per cent Other bonds and securities Per cent 1890 Get. 2 329 90.3 2.7 7.0 445 91.0 2.7 6.3 1891 Sept. 25 337 89.6 3.0 7.4 461 90.5 2.8 6.7 1892 Sept. 30 384 89.9 2.3 7.8 532 90.4 2.4 7.2 1893 Oct. 3 329 85.4 6.1 8.5 436 86.7 5.3 8.0 1894 Oct. 2 421 85.7 5.0- 9.3 554 86.8 4.5 8.7 1895 Sept. 28 424 85.9 5.4 8.7 559 87.3 4.8 7.9 1896 Oct. 6 379 82.8 7.7 9.5 498 85.0 6.6 8.4 1897 Oct. 5 476 85.7 5.7 8.6 609 86.7 5.3 8.0 1898 Sept. 20 568 77.8 12.2 10.0 727 80.2 10.4 9.4 1899 Sept. 7 649 83.5 7.4 9.1 856 84.6 6.3 9.1 1900 Sept. 5 715 79.7 9.5 10.8 943 81.0 9.1 9.9 1901 Sept. 30 769 79.5 9.2 11.3 1,052 81.1 9.0 9.9 1902 Sept. 15 778 78.0 10.2 11.8 1,091 80.5 9.1 10.4 1903 Sept. 9 829 76.2 9.9 13.9 1,139 79.3 8.9 11.8 1904 Sept. 6 1,016 79.5 7.1 13.4 1,344 81.2 7.0 11.8 1905 Aug. 25 1,021 78.9 6.8 14.3 1,378 81.2 6.5 12.3 1906 Sept. 4 897 78.2 6.6 15.2 1,266 80.3 6.9 12.8 1907 Aug. 22 934 76.3 6.2 17.5 1,338 79.4 6.3 14.3 1908 Sept. 23 1,144 79.2 5,6 15.2 1,551 80.2 6.3 13.5 1909 Sept. 1 1,164 79.6 5.2 15.2 1,618 80.8 6.0 13.2 1910 Sept. 1 1,082 80.8 5.1 14.1 1,561 81.8 6.0 12.2 1911 Sept. 1 1,153 76.8 5.2 18.0 1,661 79.5 5.6 14.9 Averages 1890-99 429.6 85.66 5.75 8.59 567.7 86.92 5.11 7.97 1900-09 926.7 78.51 7.63 13.86 1,272.0 80.50 7.51 11.99 360 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA TABLE 92— (Concluded) S AND SeCUEITIES OF THE National Banks in New York Ci.tt, , THE Central Reserve Cities, THE RESBB TIES, AND Country Districts at the Date or the Report Nearest October 1, in Each Year, 1890-1911 Reserve cities A Country districts Date Loans and securities in millions of dollars Loans Per cent U.S. bonds Per cent Other bonds and securities Per cent Loans and securities in millions of dollars Loans Per cent U.S. bonds Per cent Other bonds and securities Per cent 1890 Oct. 2 556 91.4 4.8 3.8 1,286 83.4 11.4 5.2 1891 Sept. 25 549 90.9 5.1 4.0 1,310 83.1 11.4 5.5 1892 Sept. 30 599 89.8 5.2 5.0 1,392 82.7 11.1 6.2 1893 Oct. 3 536 86.6 8.4 5.0 1,258 79.7 13.5 6.8 1894 Oct. 2 593 86.5 7.3 6.2 1,293 78.3 13.3 8.4 1895 Sept. 28 610 86.4 7.7 5.9 1,338 78.1 13.3 8.6 1896 Oct. 6 576 84.2 9.4 6.4 1,288 76.5 15.0 8.5 1897 Oct. 5 631 85.3 8.4 6.3 1,312 76.3 14.6 9.1 1898 Sept. 20 682 82.1 10.0 7.9 1,377 74.8 15.5 9.7 1899 Sept. 7 828 81.9 8.9 9.2 1,500 74.3 14.7 11.0 1900 Sept. 5 905 80.1 9,8 10.1 1,647 74.1 14.8 11.1 1901 Sept. 30 1,020 78.8 9.7 11.5 1,882 74.1 13.8 12.1 1902 Sept. 15 1,095 79.4 9.5 11.1 2,091 74.9 12.7 12.4 1903 Sept. 9 1,163 77.7 10.8 11.5 2,286 74.4 13.6 12.0 1904 Sept. 6 1,194 77.3 11.0 11.7 2,378 73.3 14.0 12.7 1905 Aug. 25 1,324 78.2 9.8 12.0 2,566 73.0 13.5 13.5 1906 Sept. 4 1,486 78.5 10.4 11.1 2,909 73.8 13.8 12.4 1907 Aug. 22 1,590 78.4 10.2 11.4 3,225 74.4 13.3 12.3 1908 Sept. 23 1,607 76.9 10.8 12.3 3,214 71.6 14.4 14.0 1909 Sept. 1 1,764 78.1 10.1 11.8 3,437 72.0 13.6 14.4 1910 Sept. 1 1,829 79.8 9.9 10.3 3,725 74.1 12.8 13.1 1911 Sept. 1 1,945 78.6 9.7 11.7 3,893 73.0 12.6 14.4 Averages 1890-99 616.0 86.51 7.52 5.97 1,335.4 78.72 13.38 7.90 1900-09 1,314.8 78.34 10.21 11.45 2,563.5 73.56 13.75 12.69 The differences between the fluctuations of deposits in rural and urban districts are similar to those between the fluctuations of loans in the same districts (see Table 93). But when the figures are averaged by decades, it appears that the net growth of deposits has been faster in the country, w^hile that of loans has been faster in the cities. Coupled with the peculiarly rapid growth of the item "due to banks," in the accounts of institutions in reserve and central- reserve cities, these figures suggest the conclusion that in an increas- MITCHELL: BUSINESS CYCLES 361 TABLE 93 Eelative Fluctuations in the Individual Deposits op the National Banks in New Yoek, the Central Reserve Cities, the Reserve Cities, and in Other Places, According to the Fourth Report Made to the Comptroller of the Currency in Each Year, 1890-1911 Average actual amounts in 1890-99 = 100 Average actual amounts in 1890-99 New York 313.0 Central reserve cities 406.6 Reserve cities 443.0 Country districts 925.5 AU national banks 1,775.4 1,890 Oct. 2 81 82 88 91 88 1891 Sept. 25 88 88 87 92 90 1892 Sept. 30 88 92 97 104 100 1893 Oct. 3 80 81 80 83 . 82 1894 Oct. 2 109 106 97 94 98 1895 Sept. 28 96 95 96 96 96 1896 Oct. 6 88 87 91 91 90 1897 Oct. 5 109 107 107 102 104 1898 Sept. 20 118 117 117 112 114 1899 Sept. 7 144 145 141 133 138 1900 Sept. 5 135 136 145 142 141 1901 Sept. 30 181 179 161 162 166 1902 Sept. 15 193 192 170 181 181 1903 Sept. 9 144 153 169 193 178 1904 Sept. 6 186 190 182 203 195 1905 Aug. 25 210 212 199 224 215 1906 Sept. 4 211 ' 213 223 254 237 1907 Aug. 22 170 182 229 277 243 1908 Sept. 23 238 237 241 272 256 1909 Sept. 1 249 256 275 298 282 1910 Sept. 1 223 236 280 318 290 1911 Sept. 1 245 257 299 .337 309 Averages 1890-99 100 100 100 100 100 1900-09 192 195 199 221 209 362 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA ing degree the great central money markets are supplied with funds drawn from the country districts. The national banks in agricultural sections seem unable to find enough local borrowers to use the funds which local depositors provide — a situation for which the clause prohibiting national banks from lending upon real estate security is doubtless responsible in part." They there- fore find it advantageous to send sums far in excess of what is needed for operations in exchange, plus what can be counted as part of their lawful reserves, to banks in the great business centers. The latter have long encour- aged this practice by paying interest, generally at the rate of 2 per cent, on (iountry-bank balances. In recent years out-of-town institutions have often realized a substantially higher return by lending money in the cities on their own account. Hence it happens that the items due to country banks from other banks increased 209 per cent between the autumns of 1890 and 1910, while their loans increased only 157 per cent. And doubtless this moderate increase of loans would be reduced still further if we could exclude the investments in the commercial paper of city firms, which country banks have come to buy in large amounts through brokers.^^ Despite the infrequency of the statements, the next table indicates that the ratio of loans to deposits behaves in much the same fashion in the country as in the cities — that is, the ratio rises before and during crises, falls during depressions, and recovers again in prosperity, if not early in the course of business revival. The chief differences among the fluctuations shown by the three groups of banks are that the movement in country districts lags somewhat behind that in the cities, and that the decline in the level of fluctuations has been greater among the country than among the reserve-city banks, and greater among the latter than among the banks of the central- reserve cities. This second difference is accounted for, not only by the above-mentioned difficulties met by country banks in finding satisfactory local borrowers, but also by the unequal decline in the ratio of capital to total liabilities. It has already been pointed out that in proportion as a bank depends less on its stock- holders and more on its depositors for funds, the ratio of its loans to deposits must decline. Now Table 95 shows that the drop in the proportion of the capital, surplus, and undivided profits to total liabilities has been most rapid among the country banks. Then in order come the banks of reserve cities, central-reserve cities and New York. The table also shows that the stability of the ratio from 1890-96 and from 1900-10 has been less remarkable among the several groups of banks taken singly than it was found to be among the national banks taken as a whole. 11 Compare 0. M. W. Sprague, Banking Beform in the United States (Cambridge, 1911), chapter ii. See also what is said in section i of the present chapter about the loans of out-of-town banks in New York. 12 Perhaps the desire of country banks to maintain their relatively high rates of interest upon local loans is a more potent factor than the unwillingness of their customers to borrow. MITCHELL: BUSINESS CYCLES 363 Chart 60. i Relative Amounts of the Individual Deposits of the National Banks / IN New York , in the Reserve Cities and in Country Districts 1630 1310. ; 300 280 Reseiwe Cities. , \ 1 ■ 260 / / / 260 • / I / 240 ! ''/ 240 I / / \ 220 1 220 / 1 1 i ; 1 f \ 200 1 \ 200 ," \ 180 1 / '" 1 II 1 1 > , ISO * J 1 It !/ / \ // 160 160 V / 140 C \ ' 1 K /• \ I 1 / \ f .* \ /• 7 ■' / 1 1 h '.■> \ / 80 f 1 1830 '31 '32 '95 '34 '95 '96 '91 '98 '99 1900 'Ol '02 'OJ '04 '05 'OS 07 '08 '09 1910 364 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 94 Ratio to the Net Deposits of the Loans and op the Loans Plus Securities Held by the National Banks OF New York City, the Central Eeserve Cities, the Eeserve Cities and the Country Districts, at the Date of the Report Nearest October 1, in Each Year, 1890-1911 New York City Ratio to deposits of Central reserve cities Ratio to deposits of Reserve cities Ratio to deposits of Country districts Ratio to deposits of Date Loans Per cent Loans and securities Per cent Loans Per cent Loans and securities Per cent Loans Per cent Loans and securities Per cent r Loans Per cent Loans and securities Per cent 1890 Oct. 2 91.1 100.9 93.5 102.8 131.9 144.4 154.2 184.8 1891 Sept. 25 93.2 104.0 94.6 104.5 130.3 143.3 154.9 186.4 1892 Sept. 30 89.1 99.2 92.0 101.7 122.8 136.8 146.4 177.1 1893 Oct. 3 91.8 107.5 92.4 106.6 139.8 161.4 156.8 196.9 1894 Oct. 2 74.1 86.5 78.5 90.4 119.0 137.6 146.7 186.3 1895 Sept. 28 82.9 96.6 86.8 99.5 122.0 141.2 140.8 180.3 1896 Oct. 6 84.9 102.4 88.9 104.6 123.7 146.9 139.3 182.2 1897 Oct. 5 81.1 94.6 82.5 95.2 114.0 133.7 134.4 176.1 1898 Sept. 20 79.9 102.7 81.4 101.5 106.5 129.6 126.1 168.6 1899 Sept. 7 79.9 95.7 81.7 96.6 100.6 122.8 118.1 159.1 1900 Sept. 5 77.8 97.6 79.8 98.5 100.4 125.3 119.5 161.2 1901 Sept. 30 79.4 99.9 81.8 100.9 99.5 126.2 115.8 156.3 1902 Sept. 15 85.5 109.6 88.6 110.1 101.9 128.2 114.3 152.6 1903 Sept. 9 85.5 112.2 88.6 111.8 104.9 134.9 114.6 153.9 1904 Sept. 6 78.5 98.7 81.7 100.6 100.8 130.4 113.6 154.9 1905 Aug. 25 81.2 102.9 83.6 102.9 99.2 126.9 109.8 150.4 1906 Sept. 4 85.7 109.5 87.3 108.7 101.8 129.7 110.4 149.6 1907 Aug. 22 87.4 114.5 88.8 111.9 102.4 130.6 110.0 147.8 1908 Sept. 23 76.6 96.8 79.3 98.9 97.4 126.7 109.0 152.2 1909 Sept. 1 79.2 99.6 80.9 100.2 95.7 122.6 105.6 146.7 1910 Sept. 1 82.3 101.9 84.7 103.5 101.0 126.6 108.1 145.8 1911 Sept. 1 77.4 100.8 80.8 101.6 97.3 123.9 105.5 144.6 Averages 1890-99 84.80 99.01 87.23 100.34 121.06 139.77 141.77 179.78 1900-09 81.68 104.13 84.04 104.45 100.40 128.15 112.26 152.56 Note. — Net deposits = individual deposits plus dividends unpaid and sums due to banks, minus sums due from banks, exchanges for the clearing house, cash items, and bills of other banks. Loans = loans and discounts plus overdrafts. Securities = all U S bonds held, plus premiums, "other bonds to secure U. S. deposits," and "bonds, securities etc " MITCHELL: BUSLNESS CYCLES 365 Chart ei. RATIO OF THE UAN3 to THE Net DEKWTa OF THE National Banks in New York, in the Reserve Cities, AND IN Country Districts . 1890 - 1910. New York City. — Reserve Cities. Country Districts. 3C6 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 95 Ratio or Capital Liabilities to Total Liabilities of the National Banks in New York, the Central Eeservb Cities, Other Eesebve Cities, and in Country Towns, According to the Eeports Made Nearest the 1st op October in Bach Year, 1890-1911 Date 1890 Oct. 2 New York City Per cent 18.9 Central reserve cities Per cent 19.5 Reserve cities Per cent 29.3 Country towns Per cent 36.0 All national banks Per cent 30.6 1891 Sept. 25 19.0 20.1 30.4 36.9 31.4 1892 Sept. 30 17.8 19.1 27.6 34.8 29.3 1893 Oct. 3 20.6 22.0 31.3 38.8 33.1 1894 Oct. 2 15.8 17.2 27.1 36.0 28.9 1895 Sept. 28 17.5 18.7 27.7 34.7 29.0 1896 Oct. 6 19.0 20.5 28.6 35.4 30.2 1897 Oct. 5 14.9 15.5 24.3 32.8 26.1 1898 Sept. 20 13.0 13.8 22.8 30.7 24.0 1899 Sept. 7 11.4 12.1 18.3 27.2 20.6 1900 Sept. 5 12.8 13.0 18.1 26.1 20.2 1901 Sept. 30 12.6 12.6 17.3 24.4 19.1 1902 Sept. 15 14.8 14.7 17.8 23.9 19.6 1903 Sept. 9 17.8 17.4 19.2 23.6 20.8 1904 Sept. 6 14.5 14.6 17.7 23.5 19.4 1905 Aug. 25 14.7 14.4 17.4 22.8 19.0 1906 Sept. 4 16.1 15.4 17.1 21.6 18.8 1907 Aug. 22 18.7 17.5 17.7 21.3 19.4 1908 Sept. 23 14.2 14.2 17.0 22.3 18.7 1909 Sept. 1 14.8 14.4 16.1 21.7 18.2 1910 Sept. 1 17.2 . 16.6 17.3 21.4 19.1 1911 Sept. 1 16.3 15.7 16.7 21.1 18.6 Averages 1890-99 16.79 17.85 26.74 34.33 28.32 1900-09 15.10 14.82 17.54 23.12 19.32 The next two tables deal with cash reserves, one giving relative fluctuations in the amounts of cash held, the other giving percentages of cash to net deposits. Despite the fact that deposits have increased faster, reserves have increased less fast in the countrj^ than in the cities. Hence the second table shows that the decline in the percentage of reserves, which all the groups have permitted to occur, has been least marked in IS'ew York, and most marked in the small towns, while the reserve cities rank between these two extremes. So decided is this decline that no group of banks has a reserve ratio in any years since 1900 equal to its average ratio in 1890-99. Years of prosperity show the heaviest declines, while years of depression show moderate upward reactions. These divergencies from the average trend of the fluctuations are less wide among the country than among the city banks. MITCHELL: BUSINESS CYCLES 367 Finally, it is interesting to note that the growth of the banking business as conducted under federal charters has been fairly uniform in city and country. Perhaps the best gauge of this growth is the increase in the aggregate resources of the national banks. Prom 1890 until 1901 the country banks lost ground relatively to the banks of New York, Chicago, and St. Louis, while those of the reserve cities a little more than held their own. But since that time the rate of expansion has been faster in the country districts than in the central- reserve cities, while the reserve-city banks have scored another slight gain. In 1910, however, the country banks had not wholh^ made up for their earlier loss in relative importance, New York stood almost exactly in the same position as in 1890, while the other central-reserve cities, and the reserve cities had TABLE 96 Relative Fluctuations in the Cash Reserves op National Banks in THE Reserve Cities, and in Other Places, According to THE Comptroller or the Currency in Bach New York, the Central Reserve Cities, the Fourth Report Made to Tear, 1890-1911 Ave: rage actual amounts in 1890-99 : = 100 Average actual amounts in 1890-99 New York City 126.2 Central reserve cities 166.5 Reserve cities 86.2 Country towns 109.7 All national banks 362.4 1890 Oct. 2 73 74 79 84 78 1891 Sept. 25 68 74 89 89 82 1892 Sept. 30 82 84 95 97 91 1893 Oct. 3 86 92 89 108 96 1894 Oct. 2 136 127 97 98 111 1895 Sept. 28 99 96 90 94 94 1896 Oct. 6 86 85 96 109 95 1897 Oct. 5 109 110 110 102 108 1898 Sept. 20 121 121 121 107 116 1899 Sept. 7 141 138 132 113 129 1900 Sept. 5 170 165 144 112 144 1901 Sept. 30 171 170 147 119 149 1902 Sept. 15 146 149 145 124 140 1903 Sept. 9 161 161 158 139 153 1904 Sept. 6 228 218 172 139 183 1905 Aug. 25 200 204 187 151 184 1906 Sept. 4 158 169 194 163 173 1907 Aug. 22 174 187 222 183 194 1908 Sept. 23 267 260 255 199 240 1909 Sept. 1 239 246 262 202 236 1910 Sept. 1 231 240 258 211 236 1911 Sept. 1 240 254 277 216 248 Averages 1890-99 100 100 100 100 100 1900-09 191 193 189 153 180 368 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA 36 UHART btL Ratio of the Cash Reserves to the Net Deposits 34 1 OF THE National Banks in New York , IN THE Reserve Cities and in Country Districts 32 1390 - 1910 ^^^^^^^■^■a Mr\A/ YnnK fiTV ( I — — Reserve: Cities \ Country Districts 30 ■30 \ y \ / \ / \ 2a \ 1 \ ^ \ / \ / ^ \ / / \ / 26 \ \ / 24 22 1 1 \ \ 22 1 1 1 \ 20 18 ] 1 : i 1 1 \ \ 1 1 \ 20 i8 / / i/ \ 1 1 \ \ \ 1 1 I \ \ f i \ 16 « 1 1 « « •^ > ^^ 0^ \ \ / \ \ 16 • « / *•». V \ / / ^ s s. / f \ --. 14 » ; » 14 ■*•.. 1 2 s 1 2 1 * ( o * ■ " • ^ / *», •••.. ■ 8 8 1890 '91 '92 '9 3 "94 '9 3 '96 '91 '98 '99 1900 'oi '02 "03 "04 '05 '06 '07 '06 '09 1910 MITCHELL: BUSINESS CYCLES 369 TABLE 97 Ratio of the Cash Eesbrves to the Net Deposits Held by the National Banks in New York, the Central Eeserve Cities, the Reserve Cities, and in Country Districts at the Date op the Fourth Eepout to the Comptroller of the Currency in the Years 1890-1911 Date 1890 Oct. 2 New York City Per cent 28.2 New York, Chicago, and St. Louis Per cent 28.4 Reserve cities Per cent 17.7 Country districts Per cent 13.2 All national banks' Per cent 18.7 1891 Sept. 25 26.5 27.9 20.1 13.9 19.5 1892 Sept. 30 26.6 26.8 18.7 13.5 18.8 1893 Oct. 3 35.3 37.4 23.2 18.5 25.1 1894 Oct. 2 35.3 34.6 19.5 15.4 23.3 1895 Sept. 28 28.5 28.5 18.1 13.9 19.7 1896 Oct. 6 29.2 29.6 21.2 17.0 21.9 1897 Oct. 5 27.2 28.6 20.1 15.0 21.0 1898 Sept. 20 27.7 28.1 19.8 14.3 20.5 1899 Sept. 7 26.3 25.8 16.9 13.1 18.7 1900 Sept. 5 29.2 28.6 17.2 12.0 19.3 1901 Sept. 30 28.1 27.1 15.7 10.9 17.7 1902 Sept. 15 25.9 25.0 14.6 9.9 15.8 1903 Sept. 9 27.5 26.3 15.8 10.2 16.5 1904 Sept. 6 28.0 27.2 16.2 9.9 17.5 1905 Aug. 25 25.5 25.4 15.4 ■ 9.7 16.3 1906 Sept. 4 24.3 24.2 14.6 9.2 14.8 1907 Aug. 22 26.8 26.1 15.7 9.2 15.3 1908 Sept. 23 28.5 27.6 17.3 10.3 17.6 1909 Sept. 1 25.8 25.3 15.7 9.5 15.9 1910 Sept. 1 27.5 26.5 15.4 9.1 15.5 1911 Sept. 1 26.6 25.9 15.2 8.8 15.2 Averages 1890-99 29.08 29.57 19.53 14.78 20.72 1900-09 26.96 26.28 15.82 10.08 16.67 Note. — Net deposits ::= individual deposits plus dividends unpaid and sums due to banks, minus sums due from banks, exchanges for the clearing house, cash items, and bills of other banks. absorbed what the small towns had lost. On the average the country banks, though vastly greater in number, have but about half of the total resources, the New York banks about one-sixth, and the other reserve-city banks, including Chicago and St. Louis, a little more than one-third. The conclusion which stands out most clearly from the tables of this section as a whole is that the development of banking has been strikingly similar in the cities and in the country. Differences are numerous, but they are differences of degree, and mostly of small degree. Moreover, most of these differences appear in the shifting of the level of fluctuations from one decade to the next rather than in sudden changes from year to year under the iuflueuce of business 370 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA TABLE 98 Relative Growth op the National Banks in New York City, the Central Eeserve Cities, the Eeserve Cities, and Country Districts, as Measured by Their Respective Shares in the Aggregate Resources of All National Banks, According to the Reports Made Nearest the 1st of October in Each Year, 1890-1911 Aggregate resources of all national banks in millions of dollars P: roportions of the aggregate resources he the national hanks in Id hy Date New York City Per cent Chicago and St. Louis Per cent Reserve cities Per cent Country districts Per cent All national hanks Per cent 1890 Oct. 2 3,141 17.0 5.6 25.0 52.4 100.0 1891 Sept. 25 3,213 17.4 6.0 24.4 52.2 100.0 1892 Sept. 30 3,510 17.2 6.3 24.6 51.9 100.0 1893 Oct. 3 3,110 17.5 5.8 24.8 51.9 100.0 1894 Oct. 2 3,474 19.9 6.2 24.9 49.0 100.0 1895 Sept. 28 3,424 18.5 5.9 25.0 50.6 100.0 1896 Oct. 6 3,264 17.7 5.7 25.3 51.3 100.0 1897 Oct. 5 3,705 19.8 6.3 25.9 48.0 100.0 1898 Sept. 20 4,004 21.1 6.6 25.5 46.8 100.0 1899 Sept. 7 4,650 21.2 7.2 26.7 44.9 100.0 1900 Sept. 5 5,048 21.1 7.4 27.1 44.4 100.0 1901 Sept. 30 5,695 21.5 7.7 26.7 44.1 100.0 1902 Sept. 15 6,114 21.2 7.6 26.3 44.9 100.0 1903 Sept. 9 6,310 19.1 7.5 26.6 46.8 100.0 1904 Sept. 6 6,975 21.9 7.4 26.1 44.6 100.0 1905 Aug. 25 7,472 20.8 7.4 26.6 45.2 100.0 1906 Sept. 4 8,016 18.4 7.1 27.3 47.2 100.0 1907 Aug. 22 8,390 16.3 7.0 27.4 49.3 100.0 1908 Sept. 23 9,327 19.7 7.0 27.0 46.3 100.0 1909 Sept. 1 9,574 18.7 7.3 27.7 46.3 100.0 1910 Sept. 1 9,826 16.9 7.3 27.7 48.1 100.0 1911 Sept. 1 10,379 17.0 7.4 27.8 47.8 100.0 Averages 1890-99 3,549.5 18.73 6.16 25.21 49.90 100.0 1900-09 7,262.1 19.87 7.34 26.88 45.91 100.0 cycles. Such is the case, for example, with the dissimilar rates at which loans and deposits have grown in city and in country, and also "svith the more rapid decline in the country districts of the ratio of loans to individual deposits, of capital liabilities to total liabilities, and of reserves to net deposits. The remaining differences which bear directly upon the subject of business cycles may be summed up in a sentence : the changes experienced or initiated by banks a]'e less prompt and less considerable in the country than in the urban centers. MITCHELL: BUSINESS CYCLES 371 IV. The Joint-Stock Banks of England and Wales The reports of the great deposit banks of France and Germany have not been compiled in such form for the whole period since 1890 as to be available for analysis here. But the Economist's half-yearly smnmaries for the joint- stock banks of England and Wales make possible a brief comparison between the effect of business cycles upon American and upon foreign banks. The most striking difference between the preceding tables for the national banks and the following tables for the English banks is the relative stability of conditions shown by the latter. Not only is the expansion of business from one decade to the next smaller in England, but so also are the changes from year to year caused by prosperity, crisis, and depression. Indeed, the fluctu- ations of the leading items during successive phases of the business cycles since 1890 are often confined to slight differences in the rate of growth. Whereas the national banks contracted their loans during the crises of 1890, 1893, 1903-04, and 1907, the English joint-stock banks were able to expand their loans slightly during the crises of 1890, 1900, and 1907. In periods of depression the changes in English loans have been slight; but steady growth has marked the periods of prosperity. The fluctuations in the amount of investments in consols, bonds, stocks, etc., consist of a moderate expansion from year to year, interrupted by a slight contraction in periods of tension — 1893, 1900, 1904, and 1907-08. The ratio of these securities to commercial loans also pursues an even course, exhibiting a slight decline toward the climax of prosperity, and a compensating increase after the crisis. The general level of these fluctuations declined a trifle between the flrst and the second decade in England, whereas it rose decidedly in America. By the close of the period the national banks still held fewer securities in proportion to their loans than the English banks had held for twenty years. Deposits rise a trifle during crises in England and change little during depression, whereas they fall sharply during crises in America and rise again during depressions. During prosperity they increase, of course, in both coun- tries. This increase in England seems to precede the increase in loans. The ratio of loans to deposits has gradually declined in England from 74 per cent in 1890 to 64 per cent in 1910, and in America from about 130 per cent in the flrst to about 100 per cent in the last year. Interruptions of this decline occur in England as in America at the climax of prosperity or during the crisis ; but the ratio does not have the same value as a barometer of business in London that it has in New York. The "reserves" credited to the national banks in the preceding tables consist wholly of lawful money actually in the vaults ; in England the reserves consist of "cash in hand, and money at call, and short notice." What proportion is cash, what deposits in the Bank of England, and what loans on call or short 372 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE 99 Summary of the Statements of the Joint-Stock Banks op England and Wales, as Compiled Semi-annually BY the London Economist, 1890-1911 Actual amounts in millions of dollars Date Capital paid up, reserve funds, and undivided profits Acceptance liabilities where stated Deposit and current accounts Miscellaneous liabilities Discounts, advances, loans, bills, etc. Investments in consols, bonds, stocks, etc. Buildings and sundries Cash in hand and money at call and short notice Total assets and liabilities 1890 May 311 93 1,716 13 1,272 366 113 387 4,275 Nov. 312 93 1,735 12 1,289 368 117 383 4,315 1891 May 330 111 1,794 17 1,312 400 137 409 4,515 Nov. 339 77 1,853 21 1,349 422 105 420 4,592 1892 May 345 76 1,907 30 1,370 439 111 443 4,727 Nov. 345 68 1,927 20 1,357 457 102 450 4,731 1893 May 350 99 1,930 26 1,375 466 121 455 4,823 Nov. 349 87 1,913 19 1,361 464 113 435 4,746 1894 May 352 93 1,916 21 1,380 460 119 428 4,773 Nov. 348 74 1,956 16 1,376 467 99 456 4,797 1895 May 350 98 2,039 23 1,397 477 123 518 5,031 Nov. 348 89 2,136 18 1,470 499 110 517 5,193 1896 May 352 115 2,217 30 1,517 523 138 541 5,438 Nov. 362 106 2,429 22 1,617 574 126 607 5,848 1897 May 366 106 2,410 31 1,645 572 137 564 5,835 Nov. 361 78 2,474 27 1,659 576 105 603 5,888 1898 May 373 107 2,566 24 1,719 604 139 613 6,149 Nov. 374 88 2,634 18 1,750 603 125 640 6,235 1899 May 385 102 2,670 23 1,769 607 144 665 6,369 Nov. 384 98 2,779 14 1,847 616 135 682 6,559 1900 May 391 107 2,754 24 1,857 619 146 659 6,561 Nov. 392 91 2,782 17 1,882 612 128 662 6,569 1901 May 403 105 2,855 34 1,924 622 152 703 6,801 Nov. 403 93 2,830 17 1,868 623 134 723 6,695 1902 May 408 116 2,846 23 1,857 633 159 749 6,795 Nov. 404 78 2,842 20 1,863 624 123 738 6,696 1903 May 418 122 2,921 29 1,885 637 170 801 6,986 Nov. 417 101 2,887 23 1,910 636 142 743 6,862 1904 May 417 133 2,864 29 1,929 612 179 726 6,891 Nov. 411 99 2,837 17 1,892 611 143 720 6,732 1905 May 415 142 2,932 27 1,906 625 180 807 7,036 Nov. 413 129 2,984 16 1,915 640 162 828 7,087 1906 May 418 191 3,054 28 1,954 641 223 874 7,384 Nov. 415 152 3,055 14 2,004 641 179 816 7,277 1907 May 420 203 3,153 29 2,071 637 229 870 7,615 Nov. 416 141 3,190 21 2,140 629 171 828 7,537 1908 May 417 216 3,156 19 2,098 612 251 849 7,619 Nov. 415 157 3,192 17 2,077 628 183 895 7,567 1909 May 420 205 3,283 16 2,081 666 230 948 7,852 Nov. 413 180 3,303 18 2,069 682 197 970 7,836 1910 May 415 201 3,334 20 2,110 668 220 972 7,940 Nov. 411 185 3,440 17 2,206 675 197 976 8,107 1911 May 413 254 3,507 20 2,277 670 276 972 8,389 Nov. 405 191 3,571 26 2,318 663 207 1,005 8,386 Averages 1890-99 351.7 92.9 2,150.0 21.3 1,491.5 498.0 121.0 510.7 5,241.9 1900-09 411.2 138.0 2,986.1 21.8 1,959.1 631.5 174.0 795.4 7,119.8 Compiled from tlie "Banking Supplements' ' of the Economist. The dat a do not include the Bank of England. MITCHELL: BUSINESS CYCLES 373 TABLE 99— (^Concluded) Summary of the Statements op the Joint-Stock Banks of England and Wales, as Compiled Semi-annually BY THE London Economist, 1890-1911 Relative amounts. Average actual amounts in 1890-99 =: 100 Cash in hand and Total assets and liabilities 82 82 90 90 92 91 91 92 96 99 104 112 111 112 117 119 122 125 125 125 130 128 130 128 133 131 132 128 134 135 141 139 145 144 145 144 150 149 151 155 160 160 100 136 Date Capital paid up, reserve funds, and undivided profits Acceptance liabilities where stated Deposit and current accounts Miscellaneous liabilities Discounts, advances, loans, bills, etc. Investments in consols, bonds, stocks, etc. Buildings and sundries Cash in hand and money at call and short notice 1890 May 88 100 80 60 85 73 93 76 Nov. 89 101 81 57 86 74 97 75 1891 May 94 119 83 80 88 80 113 80 Nov. 96 83 86 98 90 85 87 82 1892 May 98 82 89 142 92 88 92 87 Nov. 98 73 90 96 91 92 84 88 1893 May 100 107 90 121 92 94 100 89 Nov. 99 93 89 89 91 93 93 85 1894 May 100 100 89 100 93 92 98 84 Nov. 99 80 91 76 92 94 82 89 1895 May 99 105 95 110 94 96 102 101 Nov. 99 96 99 82 99 100 91 101 1896 May 100 124 103 142 102 105 114 106 Nov. 103 114 113 103 108 115 104 119 1897 May 104 114 112 146 110 115 113 110 Nov. 103 84 115 126 111 116 87 118 1898 May 106 115 119 114 115 121 115 120 Nov. 106 94 123 82 117 121 103 125 1899 May 109 110 124 110 119 122 119 130 Nov. 109 106 129 66 124 124 111 133 1900 May 111 115 128 112 124 124 121 129 Nov. 111 97 129 77 126 123 105 130 1901 May 114 113 133 ]60 129 125 126 138 Nov. 115 100 132 77 125 125 111 142 1902 May 116 125 132 110 124 127 131 147 Nov. 115 84 132 96 125 125 102 144 1903 May 119 131 136 137 126 128 141 157 Nov. 118 109 134 108 128 128 117 145 1904 May 119 143 133 135 129 123 148 142 Nov. 117 107 132 77 127 123 118 141 1905 May 118 153 136 126 128 126 148 158 Nov. 117 138 139 76 128 128 134 162 1906 May 119 205 142 130 131 129 185 171 Nov. 118 164 142 66 134 129 148 160 1907 May 119 218 147 137 139 128 189 170 Nov. 118 151 148 100 144 126 142 162 1908 May 118 233 147 89 141 123 207 166 Nov. 118 169 148 80 139 126 151 175 1909 May Nov. 119 117 221 193 153 154 76 82 140 139 134 137 190 163 186 190 1910 May Nov. 118 117 216 199 155 160 94 80 141 148 134 136 182 163 190 191 1911 May Nov. 117 115 273 206 163 166 94 122 153 155 135 133 228 171 190 197 Averages 1890-99 100 100 100 100 100 100 100 100 1900-09 117 149 139 102 131 127 144 156 Compiled from the "Banking Supplements" of the Economist. The data do not include the Bank of England. 374 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA 160 150 140 130 120 1 10 100 90 ao 70 200 190 ISO no 160 150 140 130 120 no 100 90 80 70 Chart 63. Relative. Amounts of the Loans , Deposits , AND Reserves of the Joint Stock Banks OF England and Wales. 1690 1910. -^ ; / / / / LOANS . Reserves Deposits. 1 1 1 / V \ V 1 / / • 1 \ \ y / / • / \ \ \ > 1 .■ 9 » .''••. A J> / A f •-... 1 * • i A "^^ "»^'^ / / /.• //• L* "r ^ Vj ^ ^ \^ ^ A / f 1 t. v y ^ 1 V / •:.- f > 1890 '91 '92 '95 '94 '95 '96 '97 '98 '93 1900 'O! '02 '03 "04 "05 '06 "07 '08 '09 1910 MITCHELL: BUSLNESS CYCLES 375 TABLE 100 Various Ratios Between Items in the Statements of the Joint-Stock Banks op England and Wales, Other Than the Bank of England Bate 1890 May Loans to deposits Per cent 74% Reserves to deposits Per cent 23% Securities to loans Per cent 29% Capital to total liabilities Per cent 15% 1902 Date May Loans to deposits Per cent 65% Reserves to deposits Per cent 26% Securities to loans Per cent 34% Capital to total liabilities Per cent 12% Nov. 74 22 29 14 Nov. 66 26 33 12 1891 May 73 23 30 15 1903 May 65 27 34 12 Nov. 73 23 31 15 Nov. 66 26 33 12 1892 May 72 23 32 15 1904 May 67 25 32 12 Nov. 70 23 34 15 Nov. 67 25 32 12 1893 May 71 24 34 15 1905 May 65 28 33 12 Nov. 71 23 34 15 Nov. 64 28 33 12 1894 May 72 22 33 15 1906 May 64 29 33 11 Nov. 70 23 34 15 Nov. 66 27 32 11 1895 May 69 25 34 14 1907 May 66 28 31 11 Nov. 69 24 34 13 Nov. 67 26 29 11 1896 May 68 24 34 13 1908 May 66 27 29 11 Nov. 67 25 35 12 Nov. 65 28 30 11 1897 May 68 23 35 13 1909 May 63 29 32 11 Nov. 67 24 35 12 Nov. 63 29 33 11 1898 May 67 24 35 12 1910 May 63 29 32 10 Nov. 66 24 34 12 Nov. 64 28 31 10 1899 May 66 25 34 12 1911 May 65 28 29 10 Nov. 66 25 33 12 Nov. 65 28 29 10 1900 May 67 24 33 12 Nov. 68 24 33 12 Averages 1901 May 67 25 32 12 1890- -99 69.7 23.6 33.2 13.7 Nov. 66 26 33 12 1900- -09 65.7 26.7 32.2 11.6 Computed from the data in Table 99. Loans include "Discounts, advances, loans, bills, etc." Deposits include "Deposit and current accounts." Securities include "Investments in consols, bonds, stocks, etc." Capital includes "Capital paid up, reserve funds, and undivided profits." Reserve includes "Cash on hand, and money at call and short notice." notice, is not definitely known, but British bankers admit that they carry rela- tively small sums of "till money." On the other hand, it must be remembered that, during the period under review, the English banks have never been driven to limit their payments of cash, while American banks have resorted to that expedient twice. In actual amount the English reserves have risen year by year with few checks. A slight falling off occurred in the crises of 1890, 1900, and 1907. The remaining cases of decline are distributed among periods of depression (1893- 376 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA 30 28 26 24- 22 Chart G4 Ratio of the Reserve to the Deposits of the Joint Stock Banks OF England and Wales. 1890 -1910. 30 28 26 24 22 A r A ^ / \ \ / A / \, i r \ / V. f \ A \J f V / 1890 '91 '92 '93 '94 '95 '96 "97 '98 '99 1900 'oi "02 "03 '04 *05 '06 '07 'OS '09 1910 94 and 1903-04), periods of revival (1896-97), and periods of Mgh prosperity (1906). More significant is the ratio of reserve to deposits. The crises have brought a slight decline; depression and revival a somewhat greater gain; the climaxes of prosperity stability or a trifling loss. All these changes are mod- erate in degree compared with the corresponding American movements. But the most noteworthy contrast between English and American developments is that the national banks have allowed their average reserves to decline from about 20 per cent in the early nineties to about 15 per cent in 1910, while the English banks have increased their ratios from about 23 to about 28 per cent. However, the difference in the character of the funds held as reserves must be remembered. Finally, the decline in the ratio of capital liabilities to total liabilities appears in England as well as in America. During the revival of business activity in the later nineties, this ratio sank from a level of 15 to one of 12 per cent. Again in the revival of 1905-06 it sank from the 12 per cent level to that of 11 per cent ; and when business revived from the depression of 1908 it sank once more to a level of 10 per cent. MITCHELL: BUSINESS CYCLES 377 V. The Central Banks of England, France, and Germany The data presented in the following tables concerning the central banks of England, France, and Uermany consist of annual averages of weekly statements. They are limited to a few of the most important items in the accounts of the banks. In none of these institutions do the fluctuations of circulation betray a close connection with the course of business cycles. As pointed out in the chapter on the currency, the elasticity of the foreign systems of note issue is confined to providing for the changing requirements of business at different seasons of a given year." Loans contract in times of depression and expand in times of prosperity. Their behavior during crises is veiled in these tables by the use of annual averages. But in sharp contrast to the American banks, it is known from other sources that all three of the central banks under discussion have proved their ability to expand their accommodations to the business public whenever need arises. Deposits in these banks vary in a rather irregular fashion, for they consist largely of government funds and deposits made by other banks. Except in the Bank of England, the ratio of loans to deposits is extremely high judged by American standards, because a large proportion of the borrowers prefer to take the proceeds of their loans in notes. But in all three banks the fluctu- ations of this ratio follow the same course as in New York — that is, the ratio falls during depression and rises during prosperity. In central banks reserves run very high in proportion to demand liabilities. Both the English and the German bank, however, have contented themselves in the second decade with somewhat lower ratios than those held in 1890-99. On the contrary, the Bank of France has raised its extremely high ratio higher still. In all three institutions the ratios have risen in periods of depression and fallen in periods of prosperity. The maximum variations are 41 and 64 per cent in England, 67 and 77 per cent in France, and 46 and 66 per cent in Germany. The lowest ratios all occur in years of crisis and the highest ratios in years of deep depression or of business revival. 13 Chapter VI, iii. 378 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA TABLE 101 Pkincipal Items Among the Eesoubces and Liabilities op the Bank of England Annual averages of the weekly statements, 1890-1911 In millions of dollars Year Capital and Eest Government securities of the banking department Other securities of the banking department Reserve : notes and specie of the banking department Notes of the issue department Deposits: public and other deposits plus 7-day bills Per cent of reserve : reserve H-by deposits 1890 87 70 114 67 181 163 41% 1891 87 53 144 76 194 186 41 1892 87 58 128 78 198 177 44 1893 87 56 124 83 200 176 47 1894 87 56 104 126 237 198 64 1895 87 69 108 145 259 235 62 1896 87 72 138 169 286 292 58 1897 87 67 140 122 243 243 50 1898 87 63 155 112 234 243 46 1899 87 66 160 103 229 242 43 1900 87 83 143 104 240 243 43 1901 87 77 140 117 251 246 48 1902 87 79 144 118 250 254 46 1903 87 80 136 116 246 244 48 1904 87 83 128 120 248 243 49 1905 87 81 146 123 255 264 47 1906 87 77 159 114 248 263 43 1907 88 74 156 119 253 262 45 1908 87 72 144 130 263 260 50 1909 87 75 146 130 265 264 49 1910 87 75 147 132 264 267 49 1911 87 72 148 136 270 270 51 Averages 1890-99 87.0 63.0 131.5 108.1 226.1 215.5 49.6 1900-09 87.1 78.1 144.2 119.1 251.9 254.3 46.8 Compiled from Palgrave's tables in the National Monetary Commission's Statistics for Great Britain, Germany, and France, pp. 80 and 83. Data for 1910 and 1911 compiled from the Bankers' Magazine (London). MITCHELL: BUSINESS CYCLES 379 TABLE 101— (Concluded) Principal Items Among the Resoueces and Liabilities of the Bank op England Relative amounts. Average actual amounts in 1890-99 = 100 Government Other Reserve: Deposits; securities securities notes and public of the of the specie of the Notes of and other banking banking banking the issue deposits plus department department department department 7-day bills 111 87 62 80 76 84 110 70 86 86 92 97 72 88 82 89 94 77 88 82 89 79 117 105 92 110 82 134 115 109 114 105 156 126 135 106 106 113 107 113 100 118 104 103 113 105 122 95 101 112 132 109 96 106 113 122 106 108 111 114 125 110 109 111 118 127 103 107 109 113 132 97 111 110 113 129 111 114 113 123 122 121 105 110 122 117 119 110 112 122 114 110 120 116 121 119 111 120 117 123 119 112 122 117 124 114 113 126 119 125 100 100 100 100 100 124 110 110 112 118 Capital and Year Rest 1890 100 1891 100 1892 100 1893 100 1894 100 1895 100 1896 100 1897 100 1898 100 1899 100 1900 100 1901 100 1902 100 1903 100 1904 100 1905 100 1906 100 1907 101 1908 100 1909 100 1910 100 1911 100 Averages 1890-99 100 1900-09 100 380 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 102 Principal Items Among the Eesources and Liabilities of the Bank op France Annual averages of the weekly statements, 1890-1911 In millions of dollars Per cent of reserve Discounts and loans on securities 177 Reserve gold and silver 485 Circulation 591 Accounts current A to circulation 82% to circulation and accounts current 69% Year 1890 Treasury 34 Private 78 1891 204 493 595 47 84 83 68 1892 164 546 608 56 81 90 73 1893 ]70 571 665 • 25 78 86 74 1894 165 595 671 31 86 89 76 1895 165 635 681 39 102 93 77 1896 204 622 696 46 102 89 74 1897 210 615 712 43 87 86 73 1898 229 598 713 49 86 84 71 1899 246 591 737 40 83 80 69 1900 264 625 779 49 84 80 69 1901 209 679 794 26 90 86 75 1902 193 706 803 30 86 88 77 1903 221 695 832 32 73 84 74 1904 232 710 827 39 95 86 74 ]905 217 764 851 48 99 90 77 1906 273 7.'59 899 50 98 84 73 1907 329 709 926 41 89 77 67 1908 275 764 937 33 90 82 72 1909 246 873 980 35 119 89 77 1910 295 823 1,003 26 106 82 73 1911 356 779 1,012 39 103 77 68 Averages 1890-99 193.4 575.1 666.9 41.0 86.7 86.2 72.4 1900-09 245.9 728.4 862.8 38.3 92.3 84.6 73.5 Compiled from the Annuaire Statistique de' France. MITCHELL: BUSINESS CYCLES 381 TABLE 102— {Concluded) Principal Items Among the Eesousces and Liabilities of the Bank of Prance Discounts and loans on securities Reserve gold and silver Circulation Accounts current Year Treasury Private 1890 92 84 89 83 90 1891 105 86 89 115 97 1892 85 95 91 137 93 1893 88 99 100 61 90 1894 85 103 101 76 99 1895 85 110 102 95 118 1896 105 108 104 112 118 1897 109 107 107 105 100 1898 118 104 107 120 99 1899 127 103 111 98 96 1900 137 109 117 120 97 1901 108 118 119 63 104 1902 100 123 120 73 99 1903 114 121 125 78 84 1904 120 123 • 124 95 110 1905 112 133 128 117 114 1906 141 132 135 122 113 1907 • 170 123 139 100 103 1908 142 133 141 80 104 1909 127 152 147 85 137 1910 153 143 150 63 122 1911 184 135 152 95 119 Averages 1890-99 100 100 100 100 100 1900-09 127 127 129 93 107 382 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 103 Principal Items Among the Resources and Liabilities op the Keichsbank of Germany Annual averages of the weekly statements, 1890-1911 In millions of dollars Per cent of reserves Year Capital and surplus Securities Discounts and loans on collateral Reserve Circulation Deposits : all demand liabilities ex- cept notes , ^ to circulation to total demand liabilities 1890 35 3 148 198 234 86 85% 62% 1891 35 3 149 220 231 110 95 65 1892 36 1 152 232 234 122 99 65 1893 36 2 161 208 234 108 89 61 1894 36 1 150 231 238 117 97 65 1895 36 2 156 249 261 119 95 66 1896 36 2 179 220 258 115 85 59 1897 36 2 179 215 258 112 83 58 1898 36 3 193 211 268 113 79 55 1899 36 3 214 205 272 125 75 52 1900 36 5 209 203 271 122 75 52 1901 45 13 219 225 283 142 80 53 1902 46 17 202 242 293 137 83 56 1903 47 19 219 224 297 132 75 52 1904 48 22 214 231 307 127 75 53 1905 58 25 233 243 318 139 76 53 1906 58 28 256 226 330 137 68 48 1907 58 24 286 226 352 138 64 46 1908 58 36 252 264 363 155 73 51 1909 58 66 240 270 375 172 72 49 1910 58 28 260 272 382 154 71 51 1911 58 11 275 288 396 155 73 52 Averages 1890-99 35.8 2.2 168.1 218.9 248.8 112.7 88.2 60.8 1900-09 51.2 25.5 233.0 235.4 318.9 140.1 74.1 51.3 Compiled from the National Monetary Commission's Statistics for Great Britain, Germany, and France, p. 173. Completed from the bank's annual report of 1911, as published in the Bankers' Magazine (London), August, 1912, pp. 277, 278. MITCHELL: BUSINESS CYCLES 383 TABLE 103— (Concluded) Principal Items Among the Eesotjrces and Liabilities op the Reichsbank op Germany Relative amounts. Average actual amounts in 1890-99 = 100 Year Capital and surplus Securities Discounts and loans on collateral Reserve Circulation Deposits : all demand liabilities ex- cept notes 1890 98 136 88 90 94 76 1891 98 136 89 101 93 98 1892 101 45 90 106 94 108 1893 101 91 96 95 94 96 1894 101 45 89 106 96 104 1895 101 91 93 114 105 106 1896 101 91 106 101 104 102 1897 101 91 106 98 104 99 1898 101 136 115 96 108 100 1899 101 136 127 94 109 111 1900 101 227 124 93 109 108 1901 126 591 130 103 114 126 1902 128 773 120 111 118 122 1903 131 864 130 102 119 117 1904 134 1,000 127 106 123 113 1905 162 1,136 139 111 128 123 1906 162 1,273 152 103 133 122 1907 162 1,091 170 103 141 122 1908 162 1,636 150 121 146 138 1909 162 3,000 143 123 151 153 1910 162 1,273 155 124 154 137 1911 162 500 164 132 159 138 Averages 1890-99 100 100 100 100 100 100 1900-09 143 1,159 139 108 128 124 384 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Chart 65 . Ratio of the Cash Reserves to the Demand Liabilities of the Bank of England . Bank of France , and Reichsbank of Germany. 1830 - 1909. Bank of England . Bank of France, Reichsbank. 78 ID 76 74 72 70 e& /' \ / \ / \ — i — 1 76 74 72 70 66 1 / \ \ \ / / \ \ / / r \ \ / / / / / \ / / \ \ — 1 1 / / / \ \ \ \ 1 / / \ / / \ \ — \ I — \ / / / V 66 66 / i ..... ' 1 • 1 1 1 t 1 / \ 62 1 t 1 1 % SO 56 W 60 \, 56 \ » \ 56 \ / \ 54 52 \ / \ \ 1 * / — i 32 ' 50 \ t 50 \ / \ t 1 \ 48 \ / \ // 48 / / \ / \ \ i / / \ 1 \ / 44 / \ / / '14 4e 40 / \ ' 1 / 42. — / 1890 91 '92 9i '94 '95 '9G '°n '98 '99 1900 'Ot '02 '03 '04 '05 '06 "07 '05 '09 MITCHELL: BUSINESS CYCLES 385 94 92 90 88 86 84 82 80 78 76 74 72 70 63 66 S4 62 GO 58 56 J4 86 84 82 80 78 76 74 72 70 68 66 64 62 SO 5h S6 54 Chart 66. Ratio of the. Loans to the Deposits OF THE Bank of E.ngland. 1890 - 1909. \ / / 1 1 1 ' 1 \ ' / \ \ / \ j 1 \ \ \ / \ \ / \ \ i / / 1890 '91 '92 '93 '94 '95 '96 '97 '98 '99 1900 'o/ '02 '03 '04 '05 '06 '07 'OB '03 386 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA TABLE 104 Ratios or Cash Reserves to Demand Liabilities and op Loans to Deposits in the Bank op England, Bank or Prance, and Eeichsbank op Germany Ratio of cash to demand liabilities Ratio of loans to deposits Bank of England banking department Per cent Bank of France Per cent Reichs- bank of Germany Per cent ' Bank of England banking, department Per cent Bank of Prance Per cent Reichs- bank of Germany Per cent 1890 41% 69% 62% 84% 167% 1487c, 1891 41 68 65 94 176 113 1892 44 73 65 86 131 106 1893 47 74 61 84 143 129 1894 64 76 65 63 127 111 1895 62 77 66 54 103 115 1896 58 74 59 57 131 133 1897 50 73 58 72 162 137 1898 46 71 55 81 178 150 1899 43 69 52 83 192 156 1900 43 69 52 72 200 156 1901 48 75 53 71 127 142 1902 46 77 56 72 123 135 1903 48 74 52 68 181 153 1904 49 74 53 63 141 154 1905 47 77 53 71 125 155 1906 43 73 48 75 177 172 1907 45 67 46 72 245 191 1908 50 72 51 67 193 149 1909 49 77 49 69 124 127 1910 49 73 51 72 178 154 1911 51 68 52 72 225 165 Averages 1890-99 49.6 72.4 60.8 75.8 151.0 129.8 1900-09 46.8 73.5 51.3 70.0 163.6 153.4 s ratios of cash to demand liabilities are from the preceding tables. The ratios of loans to deposits are computed for the of England by dividing "other securities" by "other deposits plus seven-day bills"; for the Bank of France by dividing The Bank of _ . ^ "discounts" by "accounts current of individuals"; and for the Reichsbank of Germany by dividing "bills of exchange" by "other demand liabilities.'* CHAPTER VIII SAVING, INVESTMENT, ENTERPRISE, AND SPECULATION I. Saving A quantitative analysis of saving cannot be made at present, because the sums saved do not come under observation until they are deposited in savings banks, put into life insurance, invested in income-bearing securities, etc. Our knowledge of how much money the people of any country put by in any year is therefore most indefinite. Even the simple question whether the volume of savings declines with business depression and rises with business prosperity cannot be answered with complete assurance. SchmoUer conjectures that in Germany the increase of capital by savings averages about II/2 per cent per annum, but that in good years the ratio probably rises above 2 per cent, and falls proportionately in bad 3^ears.' On the other hand, certain writers upon the theory of crises assume that depression does not check saving in an apprec- iable degree, though it does make people timid about investing their new accumulations. On this view, the phase of depression in a business cycle is characterized by the piling up of enormous sums of idle funds, and the phase of prosperity by their rapid investment.^ To determine which of these opinions is correct, we have no recourse other than the drawing of inferences from certain opposing tendencies, the relative magnitude of which is not accurately knovm. Business depression favors saving in that it discourages extravagance and usually reduces the cost of living. The classes whose money incomes are not diminished — salaried people who keep their postions and their old rates of pay, landlords who keep their tenants on the old leases, bondholders whose securities prove sound, etc. — these classes have a better opportunity to save when times are dull than when times are brisk. But there are larger classes whose money incomes decline more rapidly than living expenses, whose curtailment of extravagance is compulsory. Workingmen are exposed to reductions of wages when times are bad, and suffer still more from irregularity of employment. Professional men working on their own account find less demand for their 1 Grundriss der Allgemeinen VolTcswirtscnaftslehre, Erste bis sechste Auflage, p. 642. 2 Such seems to be Spiethoff 's view, though he does not state it explicitly. See ' ' Die Krisentheorien von M. V. Tugan-Baranowski und L. Pohle," JahriucTi fiir Gesetzgebung, 1903, pp. 679-708, especially pp. 699-701. [387] 388 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA services, if like lawyers and engineers they cater to business needs, or difficulty in collecting their bills, if like physicians they cater to imperious personal needs. Business men bear even heavier losses, for profit is the type of income which is most sensitive to changes in business conditions. Capitalists whose property consists in stocks usually suffer loss of income through reduction of dividends. And business enterprises, which often save up large surplus funds in periods of good trade, are more likely to encroach upon their old savings than to accumulate new when trade is bad. Thus, while depression may inculcate the virtue of thrift, it narrows the margin of income available for saving in the case of the great majority of families and business enterprises. The net effect is probably to reduce the volume of saving, particularly in countries where the distribution of wealth is most unequal. SchmoUer hazards the guess that three-fifths of German savings are made by the rich and the large business men.^ The bulk of French savings, on the contrary, is represented by those conversant with the situation as coming from the agglomeration of millions of small sums put aside by people in himible or modest circumstances.* Since the incomes of great business men and of large capitalists (aside from bondholders) are peculiarly susceptible to the influence of depression and prosperity, it follows that German savings probably fluctuate more violently than French savings from one phase of a business cycle to the next. And since both the distribution of wealth and the diffusion of thrift in America and England are more like the German than the French model, it follows that savings in these two countries probably vary widely from prosperity to depression. Moreover, the tacit assumption that enormous sums saved in periods of depression are kept idle until the next wave of prosperity sweeps their ovoiers back to the investments markets runs counter to much that we know about the financial habits of Anglo-Saxon communities at least. The hoarding of money through a period of .years is certainly less common among thrifty Americans and English now than it was before the advantages of investment in savings banks, life insurance, and securities had become well known. While much hoarding of this kind may go on in France and Germany, it is probably declining even among the peasantry of those countries. What does happen demonstrably is that the character of investment changes from prosperous to dxiU times. After a crisis risky investments fall into disfavor, and the highest grade of bonds are bought more freely." But of course this change does not mean that the volume of savings has increased. 3 Op. cit., p. 635. * For example, see A. Neymarek, ' ' French Savings and .Their Influence, ' ' in the Publications of the National Monetary Commission (Senate Document, no. 494, 61st Congress, 2d session), pp. 165-181. 5 See the next section. MITCHELL: BUSINESS CYCLES 389 Finally, the flood of money which is often poured into the investment market in the early years of a period of prosperity need not be likened to the outflow from a reservoir in which the exceptionally large savings of several years of depression have been impounded. Part of the funds are merely transferred from the bond market to the stock exchange. On the latter market a given sum becomes the basis of transactions which are nominally much greater in volume than the same sum employed on the former market. For a much larger proportion of bonds are bought outright, paid for in full, and held for months or years than in the case of stocks, where the bulk of the purchases are made on margins Avith the intention of selling again at the flrst favorable turn. Moreover, if the preceding conclusions be sound, the increase of funds pouring into the investment markets results partly from an increase in the actual volume of current savings. When depression yields to prosperity, money incomes — especially profits — rise faster than the cost of living, and the thrift inculcated by hard times yields but slowly to the extravagance encouraged by flush times. Finally, a considerable portion of the savings made during a period of depres- sion goes to meet obligations incurred before the preceding crisis." When these old debts have been paid off, and the debit accounts run up during the dull times themselves have been squared, savers are free to invest their fresh accumulations as they see flt. In short, there is small room for doubt that saving, like most of the activities of economic life, is subject to the rhythm of business cycles, slowing down in depression, speeding up in prosperity. But, after all, the volume of saving is important chiefly for its influence upon the volume of investment. Fortu- natelj^ on this subject we have relatively full and reliable information in quantitative form. II. Investment, Enterprise, and Speculation As types of economic activity, investment, enterprise, and speculation may ibe clearly distinguished. In many cases the three tyjies are even represented by three sets of men — for example, the trustee seeking to "place" funds safely for the sake of interest, the merchant actively managing a business enterprise for profit, and the operator in the wheat-pit dealing in "futures." But in a larger number of cases the distinction is blurred ; for not only is the same man often investor, enterpriser, and speculator in one, but one type of his activity also merges into the others. Thus when the investor buys stocks the act assim- ilates him to the enterpriser, and when he buys real estate trusting to a rise of prices the act assimilates him to the speculator. Similarly the business man is an investor in so far as he puts his own capital into his enterprise, and 6 Compare N. Johannsen, A Neglected Foint in Connection with Crises (New York, 1908). 390 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA a speculator in so far as every venture involves the assumption of risk. So, also, the' speculator invests some fmids of his own, at least a narrow "margin" upon the purchase price of his stocks, and he may take an active part in the management of a business enterprise in order to promote his campaign upon the stock market. The intimacy of these connections among the three types of activity makes it difficult to find statistical records which show the volume of investment apart from the voliune of speculation, or the activity of business enterprise apart from both speculation and investment. Stock-exchange transactions, for example, are predominantly speculative in character ; but the investment factor is not unimportant, though it cannot be separated from the speculative factor in the records. Bond purchases, on the other hand, are made chiefly by investors; but speculation in the price of bonds is by no means unknown. Similarly with the tables of "capital applications," "flotations," "listings" on the stock exchange, etc. The figures may be intended to show the fluctu- ations in the sums invested in business ventures ; but they also show the varying activity of business enterprise in seeking loans for new undertakings or for the extension of old, and often they reflect the intensity of interest in speculative ventures. For this reason it is inexpedient to attempt to separate the statistical investigations into investment, enterprise, and speculation. Certain indices are available which apply almost wholly to one tj^e of activity to the exclusion of the other types; but most of the recorded transactions are those in which two or even all three of the types are joined together. 1. Savings-bank Deposits The deposit of funds in savings banks approximates closely to an act of pure investment. Fortunately, the obvious propriety of exercising close supervision over the conduct of fiduciary enterprises entrusted with the savings of people unskilled in business has led to the compilation and publication of relatively full statistics on the subject. The figures of most significance for the present purpose are brought together in the next table. In the United States, the increase or decrease of savings-bank deposits is clearly correlated with the prosperity or depression of business. In the years immediately following the major crises of 1893 and 1907 depositors drew out more money than they paid in. Every other year since 1890 shows a net gain in deposits. However, the maximum ratios of gain occur in years of -widely diffused prosperity, or in years when a mild reaction interrupts a period of business expansion, as in 1900 and 1910. Under the latter circumstances people seem to put into the savings banks funds which they would have kept MITCHELL: BUSINESS CYCLES 391 TABLE 105 Deposits in the Savings Banks op the United States, United Kingdom, France, and Germany By Years, 1890-1911 Actual amounts In millions of dollars Relative amounts Average actual amounts in 1890-99 = 100 Kates of increase ( + ) or decrease ( — ) during the year Year 1890 'united States 1,525 United Kingdom 542 France 642 Germany 1,223 United States 83 United Kingdom 79 Trance 84 Germany 77 United States + 7.0% United Kingdom +2.9% F'rance + 10.2% Germany +5.5% 1891 1,623 557 687 1,272 88 81 90 80 + 6.4 +2.8 + 7.0 +4.1 1892 1,713 575 742 1,331 93 83 97 84 +5.5 +3.2 + 8.0 +4.6 1893 1,785 598 724 1,404 97 87 95 88 +4.2 +4.0 — 2.4 +5.5 1894 1,748 646 768 1,492 95 94 100 94 —2.1 +8.0 + 6.1 + 6.3 1895 1,811 697 801 1,617 99 101 105 102 +3.6 +7.9 + 4.3 +8.4 1896 1,907 753 804 1,726 104 109 105 109 +5.3 +8.0 + .4 +6.7 1897 1,939 800 824 1,830 106 116 108 116 +1.7 +6.2 + 2.5 +6.3 1898 2,066 843 825 1,944 113 122 108 122 + 6.5 +5.4 + .1 +5.9 1899 2,230 883 837 2,040 122 128 109 128 + 7.9 +4.7 + 1.5 +4.9 1900 2,450 910 825 2,102 134 132 108 132 +9.8 +3.1 — 1.4 +3.0 1901 2,597 936 855 2,276 142 136 112 143 +6.0 +2.9 + 3.6 +8.3 1902 2,750 959 847 2,458 150 139 111 155 +5.9 +2.4 — .9 +8.0 1903 2,935 967 831 2,644 160 140 109 166 +6.7 +0.8 — 1.9 +7.5 1904 3,060 976 856 2,836 167 142 112 179 +4.2 +0.9 + 3.0 +8.3 1905 3,261 997 898 3,023 178 145 117 190 +6.5 +2.1 + 4.9 + 6.6 1906 3,482 1,017 921 3,187 190 147 120 201 +6.8 +2.0 + 2.6 +5.5 1907 3,690 1,020 960 3,306 201 148 125 208 +6.0 + 0.3 + 4.2 +3.7 1908 3,661 1,033 1,009 3,464 200 150 132 218 —0.8 +1.3 + 5.1 +4.8 1909 3,713 1,055 1,056 3,731 202 153 138 235 +1.4 +2.1 + 4.7 +7.7 1910 4,070 1,076 3,994 222 156 251 +9.6 +2.0 + 7.0 1911 4,213 1,117 230 162 +3.5 +3.8 Averages 1890-99 1,834.7 689.4 765.4 1,588.5 100 100 100 100 +4.6 +5.3 + 3.8 +5.8 1900-09 3,159.9 987.0 905.8 2,902.7 172 143 118 'l83 +5.3 +1.8 + 2.4 + 6.3 n»ta from the RevoTt of the Comptroller of the Currency, the National Monetary Commission's Statistics for Great Britain Germany, Data iromthe^iiepore o; me^uompiro^^^ ^^^^ ^^^ statistical abstracts of the respective countries. All kinds of savings hanks mak- and France, pp. 42, 229, ing returns are included in all of the countries. 392 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA- Chart 67. / 05^n Relative Amount of Savings Deposits in the United States, United Kingdom , France, and Germany. « i / 220 / 1890 - 1911. / / ^ ^ — — United Kingdom. • • ■* ^ / 200 • / • ^•^•— Framce. / / — • Germany. • / 190 180 no IGO 150 lAn 180 no leo 150 140 130 120 no 100 t » » 1 / .' Jf 1 y / ^^ y^ y^ ,^«> ^^ J I y t 130 120 no 100 y > /I / / / /' ■■"•i. y / y' i. .^ /- y / y- > '/ 90 80 // / 90 80 / / / f >' 70 70 1890 '91 V '93 '94 '95 '96 '91, "98 '99 1900 'oi "02 '05 '04 '05 '06 '01 '08 '09 1910 'll MITCHELL: BUSINESS CYCLES 393 in hand or in checking deposits if trade had remained active. In Great Britain no year shows a decline; but the rate of gain is slight when times are dull. Returning prosperity at first stimulates deposits ; but at the height of a business "boom" the British saver turns to investments which promise a higher rate of interest than the savings banks pay. It is also noticeable that the decennial average of growth in savings deposits was much lower in 1900-09 than in 1890-99. For once the French figures are less regular than the American and British. The main conclusion which they suggest is that some factor other than the shifting of business conditions must exercise a strong influence over the clients of the savings banks. In Germany, as in Great Britain, every year shows a gain upon its predecessor, but the ratio of gain varies, declining when times are hard, rising when times improve, and then shading off again when prosperity reaches its apex. The one exception to this rule — the rapid gain of deposits during the dull years 1901 and 1902 — probably results from a trans- ference of funds from commercial and mortgage to savings banks after confi- dence in the solvency of the former had been shaken by the fall of the Leipziger Bank, the Dresdener Kreditanstalt, and four mortgage banks. 2. Purchases of Bonds and of Stocks As has been said, there is certainly more or less speculation in bonds, and much investment in stocks.'' Nevertheless, the sales of bonds and of stocks upon the New York Stock Exchange may be taken as rough gauges respectively of the fluctuations in the volume of investment and of speculation. Since the figures are published monthly, it is feasible to present them not only by years but also by periods which correspond to the successive phases of business cycles. The use of par values makes the tables reflect changes in the number of securities sold, rather than changes in the pecuniary volume of transactions. Were similar figures based upon market values available, the differences shown by the present tables between the fiuctuations in bond and stocks sales would be still more strongly accentuated. For the differences between the fiuctuations in the relative prices of bonds and stocks brought out in Chapter IV run roughly parallel with the differences between the fluctuations of sales. In periods of severe depression investment in bonds increases, while specu- lation in stocks declines or rises but little in comparison with bond sales. When business begins to revive, both bond and stock sales increase, but bond sales at a much faster pace.. Before prosperity has reached its culmination bond sales decline, while stock sales containue to follow an ascending saw-tooth curve. As a crisis approaches bond sales decline rapidly, while stock sales decline 7 Speculation in bonds has been increased in late years by the large issues of income, debenture, and con- vertible bonds. Compare W. Z. Eipley, "Kailway Speculation," Quarterly Journal of Economics, February, 3911, pp. 191, 192. 394 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 106 Par Values op the Eailway and Miscellaneous Bonds and Stocks Sold on the New York Stock Exchange Bt Years, 1890-1911 Actual amounts In millions of dollars Year 1890 Bonds 402 Stocks 6,612 1891 384 6,676 1892 486 7,670 1893 352 7,550 1894 340 4,822 1895 500 6,313 1896 363 5,111 1897 530 7,426 1898 889 10,833 1899 828 17,094 1900 569 13,372 1901 994 25,850 1902 880 17,789 1903 684 15,028 1904 1,015 17,394 1905 816 24,400 1906 606 24,843 1907 456 17,006 1908 999 17,694 1909 1,279 19,634 1910 592 14,730 1911 795 11,489 Averages 1890-99 507.4 8,010.7 1900-09 829.8 19,301.0 Relative amounts Av. actual amounts in 1890-99 = 100 A Bonds Stocks 79 83 76 83 96 96 69 94 67 60 99 79 72 64 104 93 175 135 163 213 112 167 196 323 173 222 135 188 200 217 161 305 119 310 90 212 197 221 252 245 117 184 157 143 100 100 164 241 Ratio of bond Bales to stock sales 1:16.4 1:17.4 1:15.8 1:21.4 1:14.2 1:12.6 1:14.1 1:14.0 1:12.2 1:20.6 1:23.5 1:26.0 1:20.2 1:22.0 1:17.1 1:29.9 1:41.0 1:37.3 1:17.7 1:15.4 1:24.9 1:14.5 1:15.9 1:25.0 Data compiled from the Commercial and Financial Chronicle and from its "Quotation Supplement.' MITCHELL: BUSINESS CYCLES 395 396 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 107 AvEKAGE Monthly Par Value or Railway and Miscellaneous Bonds and Stock Exchange in Seasons op Business Prosperity, Crisis, and Av. actual amounts In millions of dollars , A . f ^ Bonds Stocks January, 1890-July, 1890— Prosperity 39 531 August, 1890-December, 1890 — Minor crisis 25 579 January, 1891-July, 1891 — Depression 25 460 August, 1891-August, 1892 — Prosperity 45 659 September, 1892-April, 1893 — Approach of crisis 34 708 May, 1893-October, 1893— Major crisis 24 572 November, 1893-Marcli, 1895 — Severe depression 28 409 April, 1895-September, 1895— Revival 52 600 October, 1895-June, 1896 — Renewed depression 34 438 July, 1896-October, 1896 — Free-silver campaign 23 458 November, 1896-June, 1897 — Depression 36 411 July, 1897-February, 1898— Revival 64 858 March, 1898-April, 1898 — Spanish war impending 39 775 May, 1898-September, 1899— Prosperity 77 1,209 October, 1899-Deeeniber, 1899— Minor crisis 47 1,347 •January, 1900-September, 1900 — Slight depression 38 874 October, 1900-Oetober, 1902— Prosperity 79 1,843 November, 1902-July, 1904 — "Rich man's panic" .56 1,142 August, 1904-August, 1905— Revival 95 2,104 September, 1905-September, 1906 — Prosperity 53 2,166 October, 1906-September, 1907 — Approach of crisis 35 1,564 October, 1907-December, 1907 — Major crisis 58 1,157 January, 1908-September, 1908 — Severe depression 69 1,318 October, 1908-December, 1909— Revival Ill 1,698 January, 1910-December, 1911 — Reaction 58 1,092 Stocks Sold on the New York Depression, 1890-1911 Av. relative amounts Av. actual amounts in 1890-99 = 100 Ratio of bond sales to stock sales Bonds Stocks 92 80 1:13.6 59 87 1:23.2 59 69 1:18.4 106 99 1:14.6 80 106 1:20.8 57 86 1:23.8 66 61 1:14.6 123 90 1:11.5 80 .66 1:12.9 54 69 1:19.9 85 62 1:11.4 151 129 1:13.4 92 116 1:19.9 182 181 1:15.7 111 202 1:28.7 90 131 1:23.0 187 276 1:23.3 132 171 1:20.4 225 315 1:22.1 125 324 1:40.9 83 234 1:44.7 137 173 1:19.9 163 197 1:19.1 262 254 1:15.3 137 164 1:18.8 MITCHELL: BUSINESS CYCLES 397 42 LHART bS Ratio of Bond Sales to Stock Sales IN New York. 1 \ 40 \ 1890 - 1911. \ 38 3G 1 36 34 ll 34 32 1 32 1 30 I 30 28 28 1 2G 24 22 20 18 16 14 12 1 26 / 24 22 20 / f \ 1 1 j / \ / \ 1 \ 1 Id / \ 1 \ \ 16 14 \ k \ \ / 1 / 12 1890 '91 "92 '95 '94 '95 '9G '97 "98 '99 1900 'Ol '02 '03 '04 '05 'OG '07 '08 '09 1910 'II 398 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA more slowly or even increase. During the crisis bond sales usually shrink to a small volume; but in 1907 they increased. In other words, investment in bonds increases under depression and reaches its climax early in the following period of returning prosperity, while speculation in stocks continues to expand until the season of prosperity has reached or even passed its culmination. Hence the volume of investment is largest in comparison -with the volume of speculation when a prosperous period is just beginning, and smallest when a crisis is approaching or is even at hand. Probably the present data minimize rather than exaggerate this difference, because the proportion of bonds bought by investors as opposed to speculators swells in periods of depression and shrinks in periods of prosperity.' 3. Applications for Investment Loans Since 1871 the Moniteur des interets matSriels of Brussels has compiled a table showing the "public emissions" of each year. M. de Laveleye, for many years the editor, explained in 1892 that the aim of his efforts was to ascertain as nearly as might be the sum of money really invested in long-time loans. Stillborn projects were rejected and loans listed on more than one market were counted but once. All the available sources of information were used; but of course the bulk of small privately negotiated loans did not come to the knowledge of the compiler." While the figures cannot be regarded as complete, they are made on a uniform plan, and provide the best available gauge of the changes from one year to the next in the volume of investment loans negotiated in Europe. The geographical classification is based on the country applying for the loan. Hence, while the totals for all countries show fluctuations in the sums presumably invested by Europeans, the figures for G-reat Britain, Prance, and Germany show fluctuations in the amount of loans which their governments and business enterprises sought to secure — not the sums which their investors 8 Thp volume of real-estate transactions is currently believed to be an excellent gauge of speculative activity. But I know of no systematic record of this character except that compiled since 1867 by Messrs. Thomas Magee & Sons of San Francisco, and published in their San Francisco Meal Estate Circular. The fluctuations are large in volume and for the most part run parallel with the course of American business cycles. Annual Sales op Eeal Estate in San Francisco 1890 $36.5 millions 1901 $29.1 millions 1891 27.5 millions 1902 47.4 millions 1892 20.6 millions 1903 47.7 millions 1893 13.6 millions 1904 45.8 millions 1894 14.2 millions 1905 74.9 millions 1895 15.9 millions 1906 67.5 millions 1896 11.5 millions 1907 31.8 millions 1897 12.9 millions 1908 31.1 millions 1898 10.7 millions 1909 33.9 millions 1899 14.6 millions 1910 31.3 millions 1900 18.5 millions 1911 35.3 millions My attention was called to these figures by Mr. Edwin A. Fisher. Compare the Bulletin de statistique et de legislation comparee, vol. 46, p. 84, and vol. 47, p. 170. MITCHELL: BUSINESS CYCLES 399 TABLE 108 Aggregate Public Applications for Investment Loans, According to the Moniteur des interets materiels By Years, 1890-1911 Actual amounts In millions of dollars Relative amounts Average actual amounts in 1890-99 = 100 Governments, states, and Year cities 1890 340 Credit establish- ments 118 Railways and industrial companies 764 Conver- sions 351 Total 1,572 Governments, states, and cities .75 Credit Railways establish- and industrial Conver- ments companies sions 75 110 63 Total 84 1891 632 254 463 109 1,459 140 161 66 19 78 1892 177 13 277 17 484 39 8 40 3 26 1893 403 111 252 394 1,160 89 70 36 70 62 1894 566 65 368 2,440 3,439 125 41 53 436 184 1895 383 137 490 251 1,260 85 87 70 45 68 1896 725 149 888 1,465 3,227 160 94 127 262 173 1897 418 171 1,131 132 1,852 93 108 162 24 99 1898 394 272 1,051 317 2,035 87 172 151 57 109 1899 481 291 1,283 121 2,176 106 184 184 22 117 1900 926 271 1,092 2,290 205 171 157 123 1901 1,001 135 782 1,918 222 85 112 103 1902 1,146 153 659 1,640 3,598 254 97 95 293 193 1903 567 257 1,023 1,688 3,534 125 163 147 302 189 1904 1,113 259 1,060 353 2,785 246 164 152 63 149 1905 1,392 358 1,615 323 3,688 308 226 232 58 198 1906 1,185 445 1,504 1,992 5,126 262 281 216 356 275 1907 1,061 294 1,562 44 2,961 235 186 224 8 159 1908 1,398 265 2,365 64 4,092 309 168 339 11 219 1909 1,643 441 2,185 474 4,743 364 279 314 85 254 1910 1,746 523 2,152 • 688 5,109 386 331 309 123 274 1911 1,114 646 1,915 143 3,818 247 409 275 26 205 Averages 1890-99 451.9 158.1 696.7 359.7 1,866.4 100 100 100 100 100 1900-09 1,143.2 287.8 1,384.7 657.8 3,473.5 253 182 199 118 186 Compiled from the Bulletin de statistique et ie legislation comparee. 400 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Chart 70 Relative: Amounts of the Publlc Applications for Investment Loans. 1690 - 1910. From, the tables of the MONITEUR DES Inte'reTS MaTERIELS MITCHELL: BUSINESS CYCLES 401 TABLE 109 British Public Applications for Investment Loans, According to the Moniteur des interets materiels By Years, 1890-1911 Actual amounts Relative amounts In millions of dollars Average actual amounts in 1890-99 = 100 Year 1890 Governments states, and cities 69 Credit Railways establish- and industrial Conver- ments companies sions 19 283 Total 372 Governments, states, and cities 84 Credit establish- ments 128 Railways and industrial Conver- companies sions 94 Total 92 1891 69 14 196 279 84 95 65 69 1892 57 8 136 1 201 70 54 45 14 50 1893 99 81 2 183 121 27 29 45 1894 119 24 153 56 351 145 162 51 800 86 1895 89 14 214 9 326 109 95 71 129 80 1896 55 15 534 2 607 67 101 177 29 150 1897 105 6 552 664 128 41 183 164 1898 91 8 436 536 111 54 144 132 1899 66 40 434 540 81 270 144 133 1900 317 27 419 763 387 182 139 188 1901 476 9 240 725 581 61 79 179 1902 332 19 251 603 405 128 83 149 1903 230 35 198 464 281 236 66 114 1904 202 23 191 416 247 155 63 102 1905 208 37 298 543 254 250 99 134 1906 77 59 240 30 406 94 399 79 429 100 1907 150 57 277 484 183 385 92 119 1908 177 32 482 2 692 216 216 160 29 170 1909 250 36 323 609 305 243 107 150 1910 229 31 483 743 280 209 160 183 1911 91 64 271 426 111 432 90 105 Averag 1890- ;es 99 81.9 14.8 301.9 7.0 405.9 100 100 100 100 100 1900-' 09 241.9 33.4 291.9 3.2 570.5 295 226 97 46 141 402 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA TABLE 110 French Public Applications por Investment Loans, According to the Moniteur des interets materiels By Years, 1890-1911 Act! In mil] lal amounts lions of dollars Relative amounts Average actual amounts in 1890-99 — 100 Year 1890 Grovernments, states, and cities 23 Credit Railways establish- and industrial Conver- ments companies sions 4 40 Total 67 Governments, Credit states, and establish- cities ments 62 18 Railways and industrial Conver- companies sions 59 Total 22 1891 168 77 59 305 455 352 86 99 1892 3 43 13 59 8 63 7 19 1893 8 41 3 52 22 60 2 17 1894 47 50 1,456 1,553 127 73 812 507 1895 1 54 78 46 179 3 247 114 26 58 1896 64 15 71 36 186 173 69 104 20 61 1897 3 4 70 83 159 8 18 102 46 52 1898 2 59 157 219 5 86 88 71 1899 50 65 172 287 136 297 252 94 1900 1 62 230 294 3 283 337 96 1901 53 8 189 251 144 37 277 82 1902 106 4 93 1,313 1,515 287 18 136 732 494 1903 16 63 58 138 43 288 85 45 1904 41 4 68 1 114 111 18 100 * 37 1905 34 20 109 163 92 91 160 53 1906 6 82 83 79 250 16 374 122 44 82 1907 47 16 154 217 127 73 225 71 1908 75 21 178 274 203 96 261 89 1909 33 122 178 333 89 557 261 109 1910 75 37 226 338 203 169 331 110 1911 17 41 199 257 46 187 291 84 Averages 1890-99 36.9 21.9 68.3 179.4 306.6 100 100 100 100 100 1900-09 41.2 40.2 134.0 139.3 354.9 112 184 196 78 116 * Less than ^ per cent. MITCHELL: BUSINESS CYCLES 403 TABLE 111 German Public Applications foe Investment Loans, Accoeding to the Moniteur des interets matiriels By Yeaes, 1890-1911 Actual amounts In millions of dollars Relative amounts Average actual amounts in 1890-S I = 100 Governments, states, and Year cities Credit establish- ments Railways and industrial Conver- companies sions Total Governments, Credit states, and establish- cities ments Railways and industrial Oonver- companies sions 1 Total 1890 98 74 51 10 233 113 111 45 8 59 1891 133 17 47 197 153 26 42 50 1892 103 3 10 116 118 5 9 29 1893 99 23 22 144 114 35 19 36 1894 66 24 25 75 190 76 36 22 58 48 1895 11 28 38 76 13 42 34 19 1896 44 76 163 1,208 1,491 51 114 144 932 377 1897 88 83 284 3 458 101 125 251 2 116 1898 83 216 266 565 96 325 235 143 1899 144 120 226 489 166 181 200 124 1900 101 93 188 382 116 140 166 96 1901 207 95 138 440 238 143 122 111 1902 229 105 79 413 264 158 70 104 1903 165 110 113 388 190 166 100 98 1904 121 159 129 409 139 239 114 103 1905 211 167 201 11 590 243 252 178 8 149 1906 265 150 223 638 305 226 197 161 1907 251 79 101 430 289 119 89 109 1908 407 137 183 726 468 206 162 183 1909 386 176 162 723 444 265 143 183 1910 243 167 168 578 280 252 148 146 1911 160 195 180 535 184 294 159 135 Averages 1890-99 86.9 66.4 113.2 129.6 395.9 100 100 100 100 100 1900-09 234.3 127.1 151.7 1.1 513.9 270 191 134 1 130 404 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Chart 7I. Relative Amounts of the Investment Loans Applied for by British , French , and German Railways and Industrial Companies. 1830 1910. British Companies. .— French Companies. German Companies. 320 MITCHELL: BUSINESS CYCLES 405 provided. The data for the United States are too incomplete to possess much significance, particularly in the earlier years. Indeed, the gradual inclusion of an increasing proportion of the loans negotiated in America is probably the most serious defect in the table for purposes of comparing one year with another. But this defect appears only in the figures for all countries, not in . the figures for Great Britain, France, and Germany. The latter figures, how- ever, as well as the totals, are affected by any changes which take place in the proportions of investment loans which are publicly advertised and privately negotiated. The use to which the tables may be safely put is therefore limited. Nothing beyond rough conclusions as to the general trend in the amount and in the character of the successful applications for investment loans can be drawn with confidence. As might be expected, the loans applied for by governments show but a slight degree of coordination with business cycles. Municipalities and states often take the condition of the money market into account when determining upon the feasibility of making improvements to be paid for by the sale of bonds, and so also may national governments in borrowing to finance public works. But even local governments are less concerned with the rate of interest they must pay than are business enterprises, and national goverimients in raising money for wars or armaments are often compelled to accept whatever terms are offered at the moment they need the money. Thus the exigencies of public finance are often a "disturbing factor" in the business situation, not only in the countries which are borrowing but also in the countries which are lending. In some years these goverimaent loans are greater than the public applications for long-time business loans; for example, in the dull years 1901 and 1902, when Great Britain was adding the Boer War debt to heavy bor- rowings by other powers. But in the long run, the sums borrowed by govern- ments are much less than the sums borrowed by business enterprises. The real disparity is probably greater than the present table indicates, because a largei" proportion of the public than of the private loans is publicly advertised. Investment loans to business enterprises, on the other hand, show a close coordination with business cycles. The amount falls off heavily in a long period of depression, and increases rapidly when prosperity returns. But the figures indicate that this increase does not continue unabated until the culmination of prosperity is attained. If the actual amount of the business loans does not decline, at least the rate of increase shrinks from large to small proportions. Difficulty in securing the ever-growing amount of loan capital for fixed invest- ment required by the ever-growing volume of business characterizes the high tide of prosperity. The first year or two of depression, on the contrary, may be marked by very heavy loans to business enterprises. But most of these loans represent the funding of floating debts incurred in the later stages of prosperity, rather than the extension of business enterprises. 406 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA Roughly speaking, conversions vary inversely as loans to business enter- prises. They are undertaken for the sake of reducing interest charges, and are therefore made only when the investment market is ready to absorb large blocks of glit-edged securities bringing in a low return. It has been shown in Section iii of Chapter IV that interest rates are low when business is depressed, or just beginning to recover from depression. Hence the great bulk of the conversions entered in the table occur in 1894-96 and 1902-03. The one apparent exception occurs in 1906. Four-fifths of the conversions of that year, however, were due to a single operation — the refunding of a large Italian loan, which, after having been deferred more than once for a better opportunity, had finally to be carried out under unfavorable conditions. Comment on the figures for Great Britain, Prance, and Germany is unnec- essary, because what has been said of the general table applies substantially to the special tables. The large role played by credit companies in continental as compared with British finance may be pointed out, however. The fact that the British are represented as borrowing so much more capital than the Germans or the French is due largely to the greater extent and higher devel- opment of British colonies. The French, it may be added, appear to be less embarrassed than the other nations hj scarcity of capital at the height of a prosperous period. This conclusion, suggested by the figures, is fortified by our knowledge of the comparative moderation of French "booms," and the extraordinary development of thrift in comparison with business enterprise as economic characteristics of the people. The Economist's estimates of the annual applications for capital in London, summarized in the next table, regularly exceed the British figures taken from the Moniteur des interets materiels by many millions. But these differences arise chiefiy from the fact that the Economist records every public application for British capital from whatever land it comes, while the Moniteur classifies as British only the applications from British sources. For our purposes the chief value of these figures is that they confirm the conclusions based upon the former compilation. Again, government loans are found to have the irregularity which results from the exigencies of public finance. But this irregularity does not altogether hide the effort of local and perhaps even of national governments to place their loans when the money market is most favorable to borrowers — that is, when business is depressed, or just beginning to revive. Business loans, on the contrary, rise and fall with the expansion and contraction of activity. The high rates for money at a time of abounding prosperity, however, cause would-be borrowers to defer their least imperative demands for fresh capital to the more favorable opportunities afforded by the first year of the succeeding depression. It is interesting to MITCHELL; BUSINESS CYCLES 407 TABLE 112 1 Capital Applications in London, Accoeding to the 'Economist By Years, 1890-1911 Actual amounts In millions of dollars Relative amounts Average actual amounts in 1890-99 = 100 Year 1890 Loans to central and local govern- ments 117 Loans to railv?ays 151 Loans Loans to other to business mining enter- companies prises 33 393 Total loans to business enter- prises 577 Grand total 694 r Loans to central and local govern- ments 69 Loans Loans to to mining railways companies 154 85 Loans to other business enter- prises 151 Total loans to business enter- prises 145 Grand total 122 1891 219 78 16 196 290 509 128 79 41 75 73 90 1892 187 102 9 97 208 395 110 104 23 37 52 70 1893 119 59 6 55 120 239 70 60 16 21 30 42 1894 227 77 24 119 220 447 133 78 62 46 55 79 1895 180 83 72 174 329 509 106 84 186 67 83 90 1896 168 86 74 416 576 744 99 87 191 160 145 131 1897 158 85 62 461 608 766 93 86 160 177 153 135 1898 214 127 35 355 517 731 126 129 90 136 130 129 1899 116 135 56 341 532 648 68 137 145 131 134 114 1900 334 86 36 349 471 805 196 87 93 134 118 142 1901 492 90 22 172 284 776 289 92 57 66 71 137 1902 407 105 50 187 342 749 239 107 129 72 86 132 1903 281 70 13 164 247 528 165 71 34 63 62 93 1904 359 86 16 138 240 599 211 87 41 53 60 105 1905 376 205 46 187 438 814 221 209 119 72 110 143 1906 196 144 36 210 390 585 115 146 93 81 98 103 1907 218 145 14 224 383 601 128 148 36 86 96 106 1908 318 363 25 229 617 935 187 369 65 88 155 165 1909 376 206 39 266 511 887 221 210 101 102 128 156 1910 446 310 36 509 855 1,301 262 315 93 195 215 229 1911 217 337 41 338 716 933 127 343 106 130 180 164 Averages 1890-99 170.5 98.3 38.7 260.7 397.7 568.2 100 100 100 100 100 100 1900-09 335.7 150.0 29.7 212.6 392.3 727.9 197 153 77 82 99 128 Compiled from the London Economist's annual "Commercial History and Review." 408 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA notice that the Economist and the Moniteur agree in making the British loans to business enterprises slightly smaller in the second than in the first decade covered by the tables. The best American substitute for the European statistics which have just been discussed is afforded by the amount of bonds and stocks listed each year on the New York Stock Exchange. These figures afford a rough gauge of the new opportunities offered for investment in large corporate enterprises. Most significance attaches to the listings of new securities. The new stocks put on the market respond with considerable regularity to changes in business conditions, falling when business is depressed and rising when business recovers, but not attaining large proportions until prosperity is fully established. The bond listings, on the contrary, show a tendency to fall comparatively little or even to increase heavily when business is dull, and to decline in the later stages of prosperity. This contrast between the amount of stocks and bonds listed agrees with the contrast brought out above between the amount of the stocks and bonds sold upon the same market. TABLE 113 Listings of Stocks and Bonds on the New York Stock Exchange By Yeaks, 1890-1911 Actual amounts in millions of dollars Stocks Bonds Year New issues Old issues newly listed Eeplaoing old securities Total New issues Old issues newly listed Replacing old securities Total 1890 161 10 263 435 198 105 382 685 1891 97 2 91 189 191 16 80 288 1892 100 48 89 237 175 12 130 318 1893 94 49 56 198 139 42 107 289 1894 37 5 210 251 185 32 93 310 1895 77 35 31 143 167 16 75 257 1896 77 514 591 147 8 427 582 1897 53 24 425 503 88 16 254 357 1898 70 53 406 528 245 26 429 •700 1899 311 393 704 156 23 346 525 1900 297 130 194 621 148 6 290 444 1901 430 76 1,136 1,642 220 21 682 923 1902 251 11 522 784 198 3 333 534 1903 173 39 215 427 192 13 377 581 1904 121 55 176 430 105 535 1905 125 100 308 533 569 20 391 980 1906 237 16 409 663 303 12 256 572 1907 159 321 96 576 247 72 102 421 1908 124 249 141 514 649 96 128 873 1909 297 364 665 1,326 713 8 378 1,099 1910 305 467 468 1,240 572 52 185 808 1911 256 38 350 644 398 35 148 581 Avei'ages 1890-99 107.7 28.25 247.8 377.9 169.1 29.6 232.3 431.1 1900-09 221.4 145.1 374.1 726.2 366.9 27.9 304.2 696.2 Compiled from the Financial Review. MITCHELL: BUSINESS CYCLES 409 CHART 72 f?ELATIVE AMOUNTS OF" OF STOCKS AND BON UPON THE NEW YORK IS9Q-19II r- NEW ISSUES 1 33 LISTED ;| EXCHANGE. ,' ; A 00 STOCKS 360 BONDS 1 360 320 320 1 ! i i 280 \_ 1 I p 1 ' ' '' 1 > ' ' 1 1 1 1 ' 1-4- i Jl 280 ^ ' 1 ' 1 '■ 240 i i 240 200 160 1 1 [ J 20O 1 t ( r ■ \ 120 ', 111 /■ SO 1 J 80 40 r t ]9a'9r'9Z'«3'94'9S'96'97'9ll'93(iaiHte'O]94'0S'0S'07'06'O9'IO'll 410 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE US— (Concluded) Listings op Stocks and Bonds on the New York Stock Exchange By Years, 1890-1911 Eelative amounts. Average actual amounts in 1890-99 = 100 Stocks Bonds Year New issues Old issues newly listed Replacing old securities Total New issues Old issues newly- listed Replacing old securities ^ Total 1890 150 35 106 115 117 355 164 159 1891 90 1 37 50 113 54 34 67 1892 93 170 36 63 103 41 56 74 1893 87 173 23 52 82 142 46 67 1894 34 18 85 66 109 108 40 72 1895 71 124 13 38 99 54 32 60 1896 71 207 156 87 27 184 135 1897 49 85 172 133 52 54 109 83 1898 65 188 164 140 145 88 185 162 ]899 289 159 186 92 78 149 122 1900 276 459 78 164 88 20 125 103 1901 399 269 458 435 130 71 294 214 1902 233 39 211 207 117 10 143 124 1903 161 138 87 113 114 44 162 135 1904 112 22 47 254 45 124 1905 116 353 124 141 336 68 168 227 1906 220 57 165 175 179 41 110 133 1907 148 1,134 39 152 146 243 44 98 1908 115 880 57 136 384 324 55 203 1909 276 1,288 268 351 422 27 163 255 3910 283 1,653 189 328 338 176 80 187 1911 238 135 141 170 235 118 64 135 Averages ] 890-99 ]00 100 100 100 100 TOO 100 100 : 900-09 206 513 151 192 217 94 131 161 4. The Establishment of Joint-Stock Companies Another piece of evidence relating to investment, enterprise, and specu- lation — all three in one — is supplied by the British, French, and German statistics of the number and nominal capital of the joint-stock companies established. These data obviously include enterprises of different size and character in the three countries, so that the actual figures for any given year cannot properly be compared with each other." But in each country the changes from year to year have much the same significance. 10 The British figures, taken from the Statistical Abstract of the United Kingdom, refer to companies regis- tered under the companies act of 1862. Railways and municipal tramways are excluded. The bulk of the joint-stock banks and the majority of private tramway companies, but not all of either class, are included. The French figures, taken from the Annuaire Statistique, include, besides joint-stock companies proper, com- panies "en nom coUectif ou en commandite simple." The German figures for 1890-1907 are from the Deutsche OeTconomist, and for 1908-11 from the Statistisches JalirbucTc fiir das Deutsche Seirh. They include " ATctienge- sellschaften" and " Kommanditgesellschaften auf ATctien." MITCHELL: BUSINESS CYCLES 411 The correlation between the number and capital of the new "flotations" on the one hand and the course of business cycles on the other hand is most marked and most regular in Germany. The French figures plainly show the influence exercised by the exposition held at Paris in 1900. An unusual number of companies with extraordinarily large capitals were formed both to prepare for the fair and to operate concessions connected with it. Except for the years 1898-1901 the French figures follow a relatively even course. The British figures are more like the German, the chief difference being that the scale of capitalization in the second decade was much smaller than in the first. More stringent legislation respecting the obligations of promoters and underwriters TABLE 114 [JMBEK AND NOMINAL CAPITAL OF THE JOINT-StOCK COMPANIES ESTABLISHED IN THE United Kingdom :, Fran AND Germany E !r Years, 1890-1911 Actual amounts Relative amounts Average actual amounts in 1890-99 =: 100 ' Number Nominal capital^ ' Number A Nominal capital Year United Kingdom France • United Germany Kingdom France Germany ' United Kingdom France United Germany Kingdom France < Germany 1890 2,789 4,470 236 1,162 83 64 74 90 118 117 54 107 1891 2,686 4,713 160 654 103 21 71 95 80 66 68 35 1892 2,607 4,699 127 503 117 19 69 94 64 51 77 32 1893 2,617 4,586 95 470 63 18 69 92 48 47 41 30 1894 2,970 4,834 92 576 89 21 79 97 46 58 58 35 1895 3,892 4,800 161 1,126 96 60 103 96 81 113 63 100 1896 4,735 4,953 182 1,506 76 64 126 100 91 152 50 107 1897 5,229 5,206 254 1,417 104 91 139 105 127 143 68 152 1898 5,182 5,602 329 1,325 276 110 138 113 164 133 181 184 1899 4,975 5,912 364 1,197 516 130 132 119 182 120 339 217 1900 4,966 5,605 261 1,079 192 81 132 113 130 109 126 135 1901 3,433 5,485 158 705 244 38 91 110 79 71 160 64 1902 3,933 5,491 87 763 108 28 104 110 44 77 71 47 1903 4,075 5,689 84 614 68 71 108 114 42 62 45 119 1904 3,831 5,814 104 450 88 33 102 117 52 45 58 55 1905 4,358 6,034 192 580 125 92 116 121 96 58 82 154 1906 4,840 6,028 212 665 122 113 128 121 106 67 80 189 1907 5,265 6,842 212 671 209 60 140 138 106 68 137 100 1908 5,024 151 508 39 133 76 51 65 1909 6,373 179 689 55 169 90 69 92 1910 7,184 186 1,037 57 191 93 104 95 1911 6,444 169 766 56 171 85 77 94 Averages 1890-99 3,768.2 4,977.5 200.0 993.6 1.52.3 59.8 100 100 100 100 100 100 1900-09 4,609.8 164.0 672.4 61.0 122 82 68 102 ^ In millions of dollars. For sources and limitations of data see note on preceding page. 412 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA may be largely responsible for this falling off in the volume of nominal capital. At all events, the present figures agree with the indications afforded by the tables of capital applications in London compiled by the Economist and of British borrowings compiled by the Moniteur des interets materiels. The next table derives its chief interest from the emphasis laid by certain German writers upon the peculiar position with reference to business cycles held by industries making industrial equipment. Among these industries, those manufacturing machinery hold perha]3s the first place. Accordingly, if the activity of a period of prosperity is really most marked among the Betriebs- mittelindustrien, a table showing the number and capital of machine-building companies should exhibit the influence of business cycles even more clearly than the preceding table for companies of all kinds. Werner 's admirable study of "Die finanzielle Brgebnisse der deutsehen Masehinenbau-aktiengesellschaf- ten'"' provides material for such a comparison. TABLE 115 ITAL OF THE JoINT-StOCK COMPANIES ESTABLISHED IN Germ OP Machinery By Yeaks, 1890-1907 Actual amounts Relative ai Av. actual a in 1890-99 nounts Number Original capital in thousands of dollars iIUOUIllJS = 100 Number Original capital 1890 8 2,694 79 ■83 1891 6 1,919 59 59 1892 4 750 40 23 1893 2 309 20 9 1894 3 983 30 30 1895 8 2,404 79 74 1896 8 2,375 79 73 1897 16 4,297 158 132 1898 22 7,629 218 234 1899 24 9,288 238 284 1900 16 4,527 158 139 1901 5 1,195 50 37 1902 2 512 20 16 1903 7 5,310 69 163 1904 6 1,585 59 49 1905 5 1,457 50 45 1906 16 4,548 158 139 1907 5 1,571 50 48 Averages 1890-99 10.1 3,264.8 100 100 Ernst Werner, "Die finanzielle Ergebnisse der deutsehen Maschinenbau-Aktiengesellschaften," Thiinen-Archiv, vol. 2, p. 666. 11 Thunen-ArcMv, vol. 2, p. 666. MITCHELL: BUSINESS CYCLES 413 The number of the companies established in this single industry within any one year is too small to possess much importance ; but significance does attach to the data for the capital. A comparison between the relative amounts of this capital, as shown in Table 115, and the relative amounts of capital for all the German joint-stock companies, as shown in the preceding table, indicates that the machine-building trades really are more subject to alternations of depression and prosperity than the other trades exploited by joint-stock companies. This evidence may fairly be quoted in favor of such a theory of business cycles as that propounded by Spiethoff.^' No American records corresponding accura,tely to the foregoing statistics of joint-stock companies are available. But Mr. Luther Conant, Jr., has pro- vided a cognate table covering the years 1887-1900 in his article upon ''Indus- trial Consolidations in the United States."" His figures exclude companies having less than $1,000,000 of capital, and all companies concerned with rail- ways, street-car systems, gas, electric lighting, etc. The capital represented is the amount of bonds and stocks authorized in the charters, not the amount TABLE 116 Number and Average Capitalization or Industrial Oombinations Formed in the United States, Together With the Increase in the Authorized Capitalization op Such Combinations By Years, 1887-1900 Actual amounts Relative amounts Average actual amounts in 1890-99 = 100 Year Numter of combinations formed Increase in Av. capitalization authorized of newly formed capitalization combinations Millions of Millions of dollars dollars Number of combinations formed Increase in authorized capitalization Average capitalization of newly formed combinations 1887 8 216 27.0 47 54 137 1888 3 24 7.9 18 6 40 1889 12 152 12.7 71 38 65 1890 13 155 11.9 76 39 61 1891 17 166 9.1 100 42 46 1892 10 193 16.8 59 49 85 1893 6 239 39.6 35 60 202 1894 2 30 13.7 12 8 70 1895 6 107 17.5 35 27 89 1896 5 50 9.0 29 13 46 1897 4 81 20.3 24 20 103 1898 20 709 34.7 118 178 177 1899 87 2,244 23.9 512 565 122 1900 42 831 19.5 247 209 99 Averages 1890-99 17.0 397.4 19.65 100 100 100 Prom Luther Conant, Jr., "Industrial Consolidations in the United States," Quarterly Publications of the American Statistical Association, vol. 7, pp. 207-236, March, 1901. 12 Compare chapter I, ii, 7. 13 Quarterly Publicatiom of the American Statistical Association, vol. 7, pp. 207-236, March, 1901. 414 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA issued. Further, increases in the capital of the combinations previously estab- lished are entered in each year, as well as the original capital of the newly organized companies. Prior to 1887, Mr. Conant finds only six industrial consolidations in the United States, with an aggregate capitalization of $170,500,000. Of these the first was formed in 1860, the next two in 1872, and one each in 1882, 1884, and 1885. The large scale of the combinations among manufacturing establishments in the later eighties and early nineties was therefore without precedent. The temporary check in 1888 Mr. Conant ascribes to the presidential election of that year. The crisis of 1890 was not severe enough and the depression of 1891 not long enough to administer another check. But the crisis of 1893 brought the movement almost to a standstill. The combinations of that year were almost almost all effected before the panic broke out; but one or two arrange- ments which had reached an advanced stage were carried through in the latter part of 1893 or in 1894. In 1895 six good sized companies were launched upon the wave of business confidence which swept over the country after President Cleveland had made his bargain for the protection of the gold reserve with the Morgan-Belmont syndicate. But when business slid from the crest of this wave into the trough of depression which accompanied the Venezuela episode and the free-silver campaign the movement halted once more. The revival of 1897 did not have so dramatic an influence as the revival of 1895 ; but the move- ment rapidly increased its momentum in 1898, and in 1899 "developed into a craze on the part of greedy promoters and vendors to unload properties on the public at enormous prices. The figures for 1899 ..." Mr. Conant con- tinues, "do not fully measure the proportions of industrial consolidations in that year. In addition to the companies shown, other projects amounting roughly in proposed capitalization to over one billion dollars were undertaken and carried to advanced stages, later, however, to be abandoned. . . . The stock market was so overloaded with new industrial securities in 1899 that promoters found great difficulty in the latter part of that year and in 1900 in inducing either bankers or the public to take up new flotations. The recurrence of another presidential election may also be . . . cited as a factor, but the chief influence was the difficulty in securing financial assistance for such schemes." 5. The Savings and Investments Made hy Business Enterprises Out of Current Income Ordinarly, discussions of savings and investment deal solely with the saving of money out of individual incomes and the investment of funds by natural persons. But it is a grave mistake to overlook the large sums which are saved out of current profits and put back into the business by business enterprises. A portion of the gross receipts of a prosperous firm or corporation is often MITCHELL: BUSINESS CYCLES 415 spent upon "betterments" of its plant or equipment, before the net profits are computed. And out of these net profits a part is frequently carried to surplus account and invested in securities, used as working capital, or otherwise dis- posed of for the benefit of the enterprise. In so far as an enterprise improves its physical property by the expenditure "of income, or accumulates a surplus, the amount of capital it needs to raise by borrowing or by selling new issues of securities is proportionately reduced. Saving and investment have been performed directly by the business enterprise itself. The statistics available upon this subject are so meager that they must be regarded as illustrations of the practice rather than as measures of the amounts involved. The data for the national banks, derived from the Reports of the Comptroller of the Currency, are limited to an exhibit of the excess of net earnings over dividends. There is such an excess in every year except 1894; TABLE 117 Savings Made by the National Banks Out of Current Income By Years Beginning March 1, 1890-1906, and by Years Ending June 30, 1907-11 Years beginning March 1, 1890-1906, and ending June 30, 1907-11 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 fl906 1 1907 1908 1909 1910 1911 Averages 1890-99 1900-09 Actual amounts In millions of dollars Relative amounts Average actual amounts in 1890-99 : : 100 Dividends 50.7 50.6 51.3 46.4 46.3 45.6 43.2 43.8 44.9 47.4 50.2 64.8 60.1 73.6 71.0 80.8 J120.1 |122.1 98.1 93.0 105.9 114.7 47.0 82.0 Net earnings 77.0 70.0 68.4 52.4 45.6 48.6 48.6 45.6 49.3 70.0 87.7 99.1 102.7 116.5 105.2 113.7 ^180.8 |185.7 132.3 131.2 154.2 157.0 57.6 122.8 Excess of net earnings ( + ) or of dividends ( — ) +26.3 + 19.4 +17.1 + 6.0 + 3.0 + 5.4 + 1.8 + 4.4 +22.6 +37.5 +34.3 +42.6 +42.9 +34.2 +32.9 +60.7 +63.6 +34.2 +38.2 +48.3 +42.3 +10.5 +40.9 Dividends 108 108 109 99 99 97 92 93 96 101 107 138 128 157 151 172 256 260 209 198 225 244 100 174 Excess of net earnings Net (-l-)orof earnings dividends ( — ) +250 134 122 119 91 79 84 84 79 86 122 152 172 178 202 183 197 ^314 1 322 230 228 268 273 100 213 +185 +163 + 57 — 7 + 29 + 51 + 17 + 42 +215 +357 +327 +406 +409 +326 +313 (+578 1+606 +326 +364 +460 +403 100 +390 Compiled from the Report of the Comptroller of the Currency, 1911, p. 324. 1906, to March 1, 1907, and June 30, 1906, to June 30, 1907. The figures for 1906 and 1907 include March 416 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA but it is trifling during the wliole period of depression in the middle nineties, rises rapidly after 1898 to a maximum of nearly $43,000,000 in 1903, then falls off in 1904-05 by about 25 per cent, rises again in the succeeding period of prosperity to about $64,000,000 in 1906-07, declines upwards of 50 per cent in 1908, and finally begins to recover olice more in 1909-10. For the banks, at least, these figures are representative. They indicate that the savings and investments of this class of business enterprises are peculiarly sensitive to changing business conditions. The railway figures, taken from the Reports on the Statistics of Railways in the United States prepared by the statistician of the Interstate Commerce Commission, are more complete, in that they show not only the surplus or deficit of annual income after the deduction of dividends from net income, but also the sums spent upon permanent improvements and charged to the income account before the net income is computed." The latter savings and investments remained small, $5,000,000 or less each year, until the period of business prosperity in the later nineties was well under way. Then they increased rapidly to thirty or forty millions, declined some- what in the "rich man's panic," and rose again to nearly $50,000,000 in 1906. The difficulties of securing adequate funds to finance growing traffic then caused the railways to reduce such expenditures in 1907, a reduction which the dull times of 1908-09 carried still further. The annual surpluses or deficits of the railways have undergone much greater changes, both absolutely and relatively, than the corresponding sums in the accounts of the national banks. In the fiscal years 1894 and 1895 huge deficits resulted from the bad state of trade and the effort to buoy up the price of stocks by maintaining dividends whether they were earned or not. In the next two years, 1896 and 1897, accounts came out nearly even. But when the return of prosperity increased earnings, the railways pursued a rather con- servative dividend policy and saved large sums which they might have distrib- uted among stockholders. For more than a decade after 1898 these savings were never less than $44,000,000 a year, and rose with fluctuations which reflect closely the varying fortunes of trade to a maximum of $141,000,000 in 1907. The panic of that year, combined with heavy dividend disbursements, reduced the surplus to a trifling sum in 1907-08, but in the very next year the railways resmned their former policy on a liberal scale. 14 "Net income" in the following table is net income from operation and from other sources as computed by the commission up to 1907 inclusive. "Permanent improvements charged to income account" were among the items deducted before striking net income. Hence the sums saved and kept in the business each year include both these improvements and the surplus, if any. Indeed, in 1908-10 the savings were larger than the table shows, since the railways made "appropriations to reserves and miscellaneous items" out of net cor- porate income amounting respectively to 22, 21, and 5 million dollars. How such items were accounted for before 1908 is not clear. The "surplus or deficit" in the table is found by subtracting "total dividends" from "net income." Since the commission adopted an improved form of income account in 1908, it has been necessary to rear- range the items so as to correspond as nearly as may be with the figures for 1890-1907. Both operating and leased roads are included. In computing the "surplus or deficit," dividends declared from surplus, as well as dividends declared from income, are deducted from the net corporate income of the current year. MITCHELL: BUSINESS CYCLES 417 TABLE 118 Investments and Savings Made by the Interstate Eailways Out or Cubbent Income By Years Ending June 30, 1890-1910 Actual amounts In millions of dollars Relative amounts Average actual amounts in 1890-99 — 100 Years ending June 30 Net income Permanent improvements charged to income account Surplus ( + )or deficit (— ) Permanent improvements charged to income account Surplus ( + )or deficit (— ) 1890 102 5 + 12 91 + 185 1891 110 5 + 14 91 + 215 1892 116 4 + 14 73 + 215 1893 111 3 + 8 55 + 123 1894 56 4 — 46 73 — 708 1895 56 4 — 30 73 — 462 1896 90 5 + 2 91 + 31 1897 81 5 — 6 91 — 92 1898 140 7 + 44 127 + 677 1899 164 13 + 53 236 + 816 1900 227 26 + 88 473 +1,354 1901 242 32 + 85 582 +1,308 1902 280 35 + 95 636 +1,461 1903 296 42 + 99 764 +1,523 1904 279 39 + 57 709 + 877 1905 327 38 + 89 691 +1,369 1906 385 49 +112 891 +1,723 1907 449 39 +141 709 +2,169 1908 393 29 + 3 527 + 54 1909 395 25 + 74 455 +1,138 1910 523 58 +117 1,054 +1,295 Averages 1890-99 102.6 5.5 + 6.5 100 + 100 1900-09 Compiled from the statistical 327.3 35.4 + 84.3 644 +1,295 reports of the Interstate Commerce Commission. See note on preceding page. 418 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Probably the sums saved and invested by business enterprises in the United States vary from a maximum of several hundreds of millions to a minus quan- tity during the periods of deepest depression. Thus the sums involved are considerable, even when compared with the enormous aggregates of individual savings. And for a theory of business cycles they derive added importance from their peculiar degree of dependence upon the alternations of prosperity and depression. 6. Investments in Railway Construction and in the Erection of Buildings The subject of investment may be approached from still another side — that of the amount of work done or sums spent in extending the nation's physical equipment for industrial or personal use. Best known among statistics of this character are the figures for railway building. Although the general lines of the American system had been laid down before 1890, and although the relative importance of this branch of construction is much less now than it was in earlier decades, still the figures possess significance, both for the actual amount of investment which they represent directly and indirectly and as a symptom of the activity in other fields. The most trustworthy data for the present purpose are the Interstate Commerce Commission's statements of the total length of line operated by the companies, including second, third, and fourth tracks, as well as yard tracks and sidings. The differences between the figures for successive years represent roughly the new construction finished, and while the lines formerly built which pass out of operation within any given time reduce the amount of new con- struction indicated by the figures somewhat below the truth, this item is not large enough to affect the conclusions materially. Another objection is that in 1908 the mileage of switching and terminal companies was segregated and excluded for the first time. But the commission has stated the mileage for these companies separately in that year, and constructed its data for 1909 on the same plan as the revised data for 1908. The figures for the increase of mileage in 1909 are therefore comparable with the figures for earlier years, save that the small amount of new construction by switching and terminal companies is not included. The results, given in Table 119, show that construction has been more extensive in good than in bad times. But it also appears that a year or two is required for a change in the business situation to exercise its full influence upon railway building. When plans for an extension of tracks have been matured, the work is likely to be carried out, even though a crisis intervenes. On the other hand, a railway may plan extensions when the first signs of returning prosperity appear upon the business horizon; but time is required to execute the work so that the new tracks can be operated. Further, the table MITCHELL: BUSINESS CYCLES 419 TABLE 119 Increase in the Total Length of Line Opekatbd by the Interstate Railways of the United States, Including Single Track, Second, Third, and Fourth Tracks and Yard Tracks and Sidings By Years Ending June 30, 1890-1910 Annual increase in mileage Years ending June 30 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 1908 1908 1909 1910 Averages 1890-99 Hundreds of miles of line operated 1,999 2,074 2,111 2,219 2,298 2,333 2,391 2,420 2,453 2,501 2,588 2,654 2,742 2,838 2,971 3,068 3,171 3,280 3,378' 3,336" 3,424^ 3,518" Actual Relative amts. amounts in Av. actual hundreds of amounts in miles 1891-99 = 100 75 37 108 79 35 58 29 33 48 87 66 88 96 133 97 103 109 94 134 66 194 142 63 104 52 59 86 156 118 158 172 238 174 185 195 176 158 168 2,279.9 55.8 100 1900-09 3,011.4 96.5 173 From the Reports of the Interstate Commerce Commission on the Statistics of Railways in the United States. ^ Mileage of switching and terminal companies included. 2 Mileage of switching and terminal companies excluded. shows that the extension of the railway network has not stopped altogeher even in he midst of the most serious depression. The smallest net gain in any year of the whole period was nearly 3,000 miles of track. Another bit of evidence is afforded by the figures showing the cost of the buildings erected in forty-five American cities, as reported by the United States Geological Survey for the years 1902-11.^'' 15 The forty-five American cities included in the report of building operations are as follows : Allegheny (united with Pittsburgh, Pa., February 1, 1908); Atlanta, Ga.; Boston, Mass.; Brooklyn, N. Y.; Buffalo, N. Y.; Cambridge, Mass. ; Chicago, HI. ; Cincinnati, O. ; Cleveland, 0. ; Columbus, O. ; Dayton, O. ; Denver, Colo. ; Detroit, Mich.; Fall Eiver, Mass.; Grand Rapids, Mich.; Hartford, Conn.; Indianapolis, Ind.; Jersey City, N. J.; Kansas City, Mo.; Los Angeles, Cal. ; Louisville, Ky.; Memphis, Tenn. ; Milwaukee, Wis.; Minneapolis, Minn.; Nashville, Tenn.; Newark, N. J.; New Haven, Conn.; New Orleans, La.; New York, N. Y. (data for the boroughs of Manhattan and Bronx only); Omaha, Neb.; Philadelphia, Pa.; Pittsburgh, Pa.; Providence, R. I.; Reading, Pa.; Richmond, Va.; Rochester, N. Y.; St. Joseph, Mo.; St. Louis, Mo.; St. Paul, Minn.; San Fran- cisco, Cal.; Scranton, Pa,; Seattle, Wash.; Syracuse, N, Y,; Washington, D, C; WoTcesterj Mass, 420 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA Chart 73- 240 Relative Amounts of New Railway Mileage: Operated in the United States . 1891 - 1910. 220 1 ' 220 200 180 160 200 \&0 f60 1 / / \ 1 / \ / j f 140 1 \ 140 120 1 \ I 120 100 \j h 100 80 60 1 / 80 / 1 / GO 1891 '92 '93 '94 'SS '9G ^^^ '98 '99 1900 'oi '02 '03 '04 '05 '06 '01 '08 '09 1910 MITCHELL: BUSINESS CYCLES 421 TABLE 120 Cost op Buildings tor "Which Permits Were Granted in 45 American Cities By Years, 1902-1911 1902 $368,000,000 1903 397,000,000 1904 460,000,000 1905 623,000,000 1906 657,000,000 1907 612,000,000 1908 535,000,000 1909 733,000,000 19] 675,000,000 1911 658,000,000 Like the data for railw.ay mileage, these figures indicate that new construc- tion never ceases, but that it is decisively stimulated by prosperity and retarded by depression. This retardation is felt, indeed, before the depression conies, if the later stages of prosperity are marked by difficulty in raising capital. CHAPTER IX PROFITS AND BANKRUPTCIES I. Profits Statistics both trustworthy and significant concerning profits are scarce. Most business enterprises not oi'ganized as joint-stock companies, and many which are so organized, seek to keep their profits from becoming public. Such accounts as are published are difficult to use because of the many different methods of reckoning profits. It is only after expert scrutiny that the pub- lished statements can be accepted, and the chief result of such scrutiny is often the discovery that information of crucial importance for determining the actual rate of profits has been skilfully withheld. When the details are furnished, it is difficult to find a workable definition of profits uniformly applicable to all industries. Further, it is only by collecting figures made by uniform methods for a considerable number of enterprises that representative results can be attained. The profits of a single enterprise can no more be accepted as an index of prevailing conditions than the price of pig-iron can be accepted as an index of fluctuations in the general level of prices. For the United States at least, these considerations practically restrict the available material covering the years 1890-1911 to industries in which the different enterprises are legally compelled to keep their accounts in a standard form, and to report the results to some official who publishes a digest of the whole. Much of the most important body of such data is that contained in the Interstate Commerce Commission's Annual Reports on the Statistics of Raihvays in the United States. 1. American Railways The leading items in the income accounts of all the interstate railways, considered as a single system, are presented in the following table.'^ The gross earnings from operation have been affected by every passing phase of the I In compiling the figures from the annual reports it has been necessary to follow the form of income account used until 1907, inclusive, although the new form, introduced in 1908, is more logical in certain respects. The meaning of the most important headings is sufficiently indicated by the following schedule of items included under each. As a rough gauge of the relative importance of each item, its aggregate amount in the year ending June 30, 1907, is given in millions of dollars. [422] MITCHELL: BUSINESS CYCLES 423 business cycles which have occurred since 1890. The activity of general busi- ness from the middle of 1889 to the middle of 1893, barring the first seven months of 1891, caused a moderate increase in traffic receipts. Then the indus- trial depression brought an abrupt loss of about 12 per cent of the total; the year 1894-95 made but a slight improvement; and the short-lived revival of trade in 1895, vs^hich swelled the earnings of 1895-96, was succeeded by renewed depression, which caused another decline in railway earnings. The definite turn of the tide came for the railways, as for other lines of business, in the summer of 1897 — that is, at the beginning of the fiscal year 1898. Thereafter gross earnings increased each year until the next major crisis came in 1907; for the depression of 1903-04 did no more than to reduce the rate of gain. But the depression which followed the panic of 1907 caused a decline of revenue reaching $149,000,000 — absolutely more, but relatively much less than the decline in 1893-94. Thus the dependence of railway earnings upon the pros- perity of business enterprises in other industries is patent. Operating expenses, which include the upkeep of the right of way- and rolling stock as well as the cost of moving trains, follow the fiuctuations of gi'oss earnings very closely. The slight divergencies indicate that railway managers find difficulty in curtailing expenses immediately when traffic falls off. But once their new plans are laid they may be able to prune expenses even in the face of slightly increasing traffic, or at least to prevent expenses from growing at the same pace as traffic. There are also indications that toward the culmination of a period of high prosperity the increasing prices of labor and supplies may make their expenses grow a trifie faster than their Amount in 1907 Gross earnings from operation $2,589 millions Passenger revenue 565 Mail 50 Express 57 Freight 1,824 Miscellaneous 93 Operating expenses 1,749 Maintenance of way 344 Maintenance of equipment 368 Conducting transportation 971 General expenses 65 Income from other sources 287 Lease of road 125 Stocks 89 Bonds 24 Miscellaneous ^^ Fixed charges 678 Interest on funded debt 344 Rents paid for lease of road 129 Taxes ^JJ Investments charged to income 39 Miscellaneous ^6 424 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA receipts. But over a considerable period of time it seems feasible to keep the cost of operating railways in close adjustment to the earnings of operation. Owing to this close adjustment, net earnings from operations agree rather closelj' with gross earnings. Net earnings fall a trifle more than gross earnings in periods of depression, rise a trifle faster in the earlier stages of prosperity, and a trifle slower than gross earnings when prosperity approaches its climax. These deviations result, of course, from the slight deviations which have been pointed out between the fluctuations of gross earnings and operating expenses. To ascertain the total income of the railways, the income from other sources must be added to the net income from operation. This additional income shows exactly the same gain in decennial averages as the items which have been dis- cussed. But from one year to the next it pursues a decidedly diiferent course, responding to changed business conditions much more slowly than does net income from operations. The cause of this tardy response becomes clear when it is noted that the chief items of "income from other sources" are rents for TABLE 121 Condensed Income Account toe the Intee-State Bailways of the United States By Yeaks Ending June 30, 1890-1910 Actual amounts in millions of dollars Years ending June 30 1890 Gross earnings from operation 1,052 Operating expenses 692 Net income from operation 360 Income from other sources 127 Total income 487 Fixed charges 385 Net income 102 Dividends 90 Surplus ( + )or deficit (— ) + 12 1891 1,097 732 365 134 499 389 110 96 + 14 1892 1,171 781 390 142 532 416 116 102 + 14 1893 1,221 828 393 150 542 431 111 103 + 8 1894 1,073 731 342 143 485 429 56 102 — 46 1895 1,075 726 350 132 482 426 56 86 — 30 1896 1,150 773 377 129 506 417 90 88 + 2 1897 1,122 753 370 125 495 413 81 87 — 6 1898 1,247 818 429 138 568 427 140 96 + 44 1899 1,314 857 457 149 605 441 164 111 + 53 1900 1,487 961 526 163 689 461 227 140 + 88 1901 1,589 1,030 558 180 738 496 242 157 + 85 1902 1,726 1,116 610 196 806 526 280 185 + 95 1903 1,901 1,258 643 206 849 553 296 197 + 99 1904 1,975 1,339 636 213 849 570 279 222 + 57 1905 2,082 1,391 692 232 924 597 327 238 + 89 1906 2,326 1,537 789 257 1,046 660 385 273 +112 1907 2,589 1,749 841 287 1,127 678 449 308 +141 1908 2,440 1,710 730 391 1,121 728 393 391 + 3 1909 2,473 1,650 823 319 1,142 747 395 321 + 74 1910 2,812 1,882 930 387 1,317 794 523 406 +117 Per ages : 1890-99 1,152.2 769.1 383.3 136.9 520.1 417.4 102.6 96.1 + 6.5 1900-09 2,058.8 1,374.1 684.8 244.4 929.1 601.6 327.3 243.2 + 84.3 Compiled froin the Interstate Commerce Commission's Reports on the Statistics of Railways in the United States. In 1908 the Commission adopted a new form of income accounts. The above figures for 1908 to 1910 were obtained by rearranging the various items for both operating and leased roads so as to conform as nearly as possible to the tables for 1890-1907 MITCHELL: BUSINESS CYCLES 425 TABLE 121— (Concluded) Condensed Income Account for the Inter-State Railways of the United States Relative amounts. Average actual amounts in 1890-99=100 Tears ending June 30 1890 Gross earnings from operation 91 Operating expenses 90 Net income from operation 94 Income from other sources 93. Total income 94 Fixed charges 92 Net income 99 Dividends 94 Surplus ( + ) or deficit (— ) + 185 1891 95 95 95 98 96 93 107 100 + 215 1892 102 102 102 104 102 100 113 106 + 215 1893 106 108 103 110 104 103 108 107 + 123 1894 93 95 89 104 93 103 55 106 — 708 1895 93 94 91 96 93 102 55 89 — 462 1896 100 101 98 94 97 100 88 92 + 31 1897 97 98 97 91 95 99 79 91 — 92 1898 108 106 112 101 109 102 136 100 + 677 1899 114 111 119 109 116 106 160 115 + 816 1900 129 125 137 119 132 110 221 146 +1,354 1901 138 134 146 131 142 119 236 163 +1,308 1902 150 145 159 143 155 126 273 193 +1,461 1903 165 164 168 150 163 132 289 205 +1,523 1904 171 174 166 156 163 137 272 231 + 877 1905 181 181 181 169 178 143 319 248 +1,369 1906 202 200 206 188 201 158 375 284 +1,723 1907 225 227 219 210 217 162 438 320 +2,169 1908 212 222 190 286 216 174 383 407 + 54 1909 215 215 215 233 220 179 385 334 +1,138 1910 244 245 243 283 253 190 510 422 +1,800 Averages : 1890-99 100 100 100 100 100 100 100 100 + 100 1900-09 179 179 179 179 179 144 319 253 +1,295 the use of leased lines, interest upon bonds and dividends upon stocks owned by the railway corporations. The amount of the first and second items is usually determined by contracts running for several or for many years, so that the receipts are not diminished promptly by business depression, unless the debtor companies are forced to compromise with their creditors, or become bankrupt. Even dividends, as a later column shows, are not promptly reduced to the same extent as traffic earnings when business becomes dull, or increased so rapidly when business revives. Because of the steadiness of this "income from other sources," the total income of railways follows the course of business cycles less closely than does net income from operation. Since the former income averages rather more than one-third of the latter, the influence of this factor in steadying total income is considerable. Indeed, the large increase in income from other sources, due almost wholly to bigger dividends upon stocks, almost offsets the loss of earnings from operation in 1907-08. 426 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Chart 74. Income , Fixed Charges , Dividends . and Surplus i 1300 OR DEFICIT OF THE INTERSTATE RAILWAYS / OF THE United 5tate3. / (200 1890 - 1910. / Total Income.. / — ^^ 1100 / Fl XEID CHABGE.9 • J / Net IhJcoME. / 1000 DlV\OENDS. / / 900 soo / / 900 / / 600 / / 100 / / / ,^ r 700 / r / / ' / 600 500 400 300 200 100 / f 600 500 400 300 200 100 y \ / / y^ yy -' 1 ^ \ . ^_ ^' .-- -■ X ^ 1 / / \ \ 1 i / A / s \ / / / / ,^- y' 1 1 1 / * / ^^^ .-' '" ...... .• \ *^'*. •••••" .■- .—- • ••^ 1 # '•.. .--•• ••'' 100 1 100 1890 '91 '31 '93 94 '95 '9e 'Sl '98 '99 1900 'Ol '02 '03 '04 '05 'OS 'O? '08 "09 1910 MITCHELL: BUSINESS CYCLES 427 From the total income it is next necessary to deduct the fixed charges, among which payments for interest on funded and floating debt and for the use of leased lines make up between two-thirds and three-fourths of the total. Of course such items are far more constant in amount than are the operating expenses. How difficult it is to retrench fixed charges was shown after the panic of 1893, Despite their desperate straits and their numerous bankrupt- cies, the interstate railways were able to reduced fixed charges less than one- half per cent between 1892-93 and 1893-94. After the panic of 1907, these charges even increased in the face of declining traffic. On the other hand, fixed charges grow less rapidly than receipts when business is brisk, and may even be reduced by careful management in the face of slowly recuperating business as in 1894-97. The deduction of these relatively stable amoimts from the total income has the effect of making net income far more variable than any of its component elements. That is, prosperity and depression raise and reduce profits propor- tionately far more than they raise and reduce gross earnings or operating expenses. The income of stockholders from railway shares, however, has been kept more stable than the profits of the railways. So anxious have been the financial managers of the companies to keep up dividends, that they have been ready to incur heavy deficits in current income by paying out more in dividends than they have received in profits. When prosperity has returned, they have pur- sued the opposite policy of paying dividends substantially less than the current profits, thereby accumulating handsome surpluses to increase the future earning capacity of the properties. 2. The National Banks The data published by the Comptroller of the Currency concerning the profits made by the national banks are much less detailed than the Interstate Commerce Commission's data concerning railway profits. But the former possess one advantage. Unlike the railway figures, they can be computed with confidence in the form of percentages of the capital and surplus employed. These percentages are not averages obtained by adding the percentages for the separate banks, and dividing by their numbers ; but the quotients obtained by dividing the total earnings and dividends by the total capital and surplus of all the national banks. While railway profits were rather more than holding their own in 1890-93, bank profits were distinctly declining, at a slow pace. The panic did not at once cause a heavy loss of earnings ; but its sequel was more serious. In the half-year September 1, 1893, to March 1, 1894, the losses on account of bad 428 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE 122 Abstract of Eeports op Earnings and Dividends of the National Banks By Half Years, 1890-1911 Actual amounts in millions of dollars Charged off Capital Losses Expenses and Gross and and Net surplus earnings premiums taxes earnings Dividends Sep. 1, 1889-Mar. 1, 1890 820 70.4 9.8 25.4 35.2 26.2 Mar. 1, 1890-Sep. 1,1890 847 74.2 11.5 25.8 36.8 24.9 Sep. 1, 1890-Mar. 1, 1891 872 76.1 8.8 27.2 40.1 25.8 Mar. 1, 1891-Sep. 1, 1891 894 75.2 11.8 27.9 35.6 25.0 Sep. 1, 1891-Mar. 1, 1892 910 75.1 11.8 29.0 34.4 25.5 Mar. 1, 1892-Sep. 1,1892 917 73.4 11.4 29.7 32.3 24.9 Sep. 1, 1892-Mar. 1, 1893 933 76.9 10.3 30.4 36.1 26.5 Mar. 1, 1893-Sep. 1, 1893 930 74.8 11.7 30.5 32.7 23.2 Sep. 1, 1893-Mar. 1, 1894 928 71.5 21.5 30.2 19.8 23.2 Mar. 1, 1894^Sep. 1, 1894 910 68.2 16.5 29.5 22.2 22.1 Sep. 1, 1894-Mar. 1, 1895 911 68.0 14.4 30.2 23.4 24.2 Mar. 1, 1895-Sep. 1,1895 905 67.5 14.2 29.8 23.5 21.8 Sep. 1, 1895-Mar. 1, 1896 903 70.9 15.4 30.4 25.1 23.7 Mar. 1, 1896-Sep. 1,1896 899 71.6 16.3 30.6 24.7 21.8 Sep. 1, 1896-Mar. 1, 1897 895 69.3 14.5 30.9 23.9 21.4 Mar. 1, 1897-Sep. 1,1897 880 68.4 17.8 30.3 20.3 21.0 Sep. 1, 1897-Mar. 1, 1898 874 71.7 15.3 31.2 25.2 22.8 Mar. 1, 1898-Sep. 1,1898 846 71.7 15.9 31.0 24.8 21.4 Sep. 1, 1898-Mar. 1, 1899 864 75.3 16.5 34.4 24.5 23.5 Mar. 1, 1899-Sep. 1,1899 850 81.2 17.2 34.1 29.8 23.2 Sep. 1, 1899-Mar. 1, 1900 858 89.6 13.3 36.1 40.2 24.2 Mar. 1, 1900-Sep. 1,1900 863 104.1 20.3 36.6 47.1 23.8 Sep. 1, 1900-Mar. 1, 1901 897 93.8 14.5 38.8 40.5 26.4 Mar. 1, 1901-Sep. 1, 1901 910 94.4 14.2 38.9 41.3 25.3 Sep. 1, 1901-Mar. 1, 1902 980 115.4 15.1 42.5 57.8 39.5 Mar. 1, 1902-Sep. 1,1902 973 105.9 14.4 42.7 48.8 28.7 Sep. 1, 1902-Mar. 1, 1903 1,054 114.8 15.7 45.1 54.0 31.4 Mar. 1, 1903-Sep. 1,1903 1,098 119.8 15.8 48.0 55.9 32.1 Sep. 1,1903-Mar. 1,1904 1,140 128.1 17.1 50.4 60.6 41.5 Mar. 1, 1904^Sep. 1,1904 1,164 121.3 16.3 52.6 52.4 34.1 Sep. 1, 1904^Mar. 1, 1905 1,177 122.5 14.4 55.3 .52.8 36.9 Mar. 1, 1905-Sep. 1, 1905 1,191 126.1 16.0 56.9 53.1 36.2 Sep. 1, 1905-Mar. 1, 1906 1,198 133.7 15.2 57.9 60.6 44.6 Mar. 1, 1906-Sep. 1, 1906 1,286 145.6 16.1 62.6 67.0 44.6 Sep. 1, 1906-Jan. 1,1907 1,323 152.1 15.0 61.7 75.4 51.3 Jan. ],1907-July ],1907 1,407 162.6 15.9 69.9 76.9 48.4 July 1, 1907-Jan. 1, 1908 1,425 163.7 25.3 73.3 65.1 43.9 Jan. 1, 1908-July 1, 1908 1,460 168.7 25.3 77.2 66.2 53.5 July 1, 1908-Jan. 1,1909 1,499 169.2 21.1 82.9 65.1 47.1 Jan. 1, 1909-July 1, 1909 1,510 179.5 19.3 94.1 66.1 45.9 July 1, 1909-Jan. 1, 1910 1,566 194.7 20.5 100.5 73.7 53.7 Jan. 1,1910-July 1,1910 1,621 207.9 18.2 109.3 80.5 52.2 July 1, 1910-Jan. 1, 1911 1,668 215.2 18.8 111.9 84.5 62.4 Jan. 1, 1911-July 1, 1911 1,688 213.8 21.2 120.1 72.5 52.3 Averages 1890-99 889 72.6 14.1 29.9 28.5 23.6 1900-09 1,189 133.6 17.2 58.3 58.1 38.7 MITCHELL: BUSINESS CYCLES 429 TABLE 122— {Concluded) Abstract of Reports op Earnings and Dividends op the National Banks By Half Ybabs, 1890-1911 Sep. 1 Mar. 1 Sep. 1 Mar. 1 Sep. 1 Mar. 1 Sep. 1 Mar. 1 Sep. 1 Mar. 1 Sep. 1 Mar. 1 Sep. 1 Mar. 1 Sep. 1 Mar. 1 Sep. 1 Mar. 1 Sep. 1 Mar. 1 Sep. 1 Mar. 1 Sep. 1 Mar. 1 Sep. 1; Mar. 1 Sep. 1 Mar. 1 Sep. 1 Mar. 1 Sep. 1 Mar. 1 Sep. 1 Mar. 1 Sep. 1 Jan. 1 July 1 Jan. 1 July 1 Jan. 1 July 1 Jan. 1 July 1 Jan. 1 1889-Mar. 1 1890-8ep. 1 1890-Mar. 1 1891-Sep. 1 1891-Mar. 1 1892-Sep. 1 1892-Mar. 1 1893-Sep. 1 1893-Mar. 1 1894-Sep. 1 1894-Mar. 1 1895-Sep. 1 1895-MaT. 1 1896-Sep. 1 1896-Mar. 1 1897-Sep. 1 1897-Mar. 1 1898-Sep. 1 1898-Mar. 1 1899-Sep. 1 1899-Mar. 1 1900-Sep. 1 1900-Mar. 1 1901-Sep. 1 1901-Mar. 1 1902-Sep. 1 1902-Mar. 1 1903-Sep. 1 1903-Mar. 1 1904-Sep. 1 1904-Mar. 1 1905-Sep. 1 1905-Mar. 1906-Sep. 1906-Jan. 1907-July 1907-Jan. 1908-July 1908-Jan. 1909-July 1909-Jan. 1910-July 1910-Jan. 1911-July ,1890 ,1890 ,1891 ,1891 ,1892 ,1892 ,1893 ,1893 ,1894 ,1894 ,1895 , 1895 ,1896 ,1896 ,1897 , 1897 ,1898 ,1898 ,1899 ,1899 ,1900 ,1900 ,1901 ,1901 ,1902 ,1902 ,1903 ,1903 ,1904 ,1904 ,1905 ,1905 ,1906 ,1906 ,1907 ,1907 ,1908 ,1908 ,1909 ,1909 ,1910 ,1910 ,1911 ,1911 Eatios Gross earnings to capital and surplus 8.59% 8.76 8.73 8.41 8.25 8.00 8.24 8.04 7.70 7.49 7.46 7.46 7.85 7.96 7.74 7.77 8.20 8.48 8.72 9.55 10.44 12.06 10.46 10.37 11.78 10.88 10.89 10.91 11.24 10.42 10.41 10.59 11.16 11.32 11.50 11.56 11.49 11.55 11.29 11.89 12.43 12.82 12.90 12.67 Net earnings to capital and surplus 4.30% 4.35 4.61 3.99 8.78 3.52 3.87 3.51 2.13 2.44 2.57 2.60 2.78 2.75 2.68 2.31 2.89 2.93 2.84 3.51 4.68 5.46 4.52 4.54 5.90 5.02 5.12 5.09 5.31 4.50 4.49 4.46 5.06 5.21 5.70 5.46 4.57 4.54 4.34 4.38 4.71 4.96 5.07 4.29 Averages 1890-99 8.17 1900-09 11.17 Compiled from the annual Reports of the Comptroller of the Currency. 3.22 4.91 Bividends to capital and surplus 3.20% 2.94 2.96 2.80 2.81 2.71 2.84 2.49 2.50 2.43 2.65 2.41 2.63 2.43 2.39 2.38 2.61 2.54 2.72 2.73 2.82 2.76 2.94 2.73 4.03 2.95 2.98 2.93 3.64 2.93 3.14 3.04 3.73 3.47 3.88 3.44 3.08 3.66 3.14 3.04 3.43 3.21 3.74 3.10 2.66 3.23 Dividends to capital 4.27% 3.92 3.95 3.75 3.78 3.66 3.85 3.40 3.41 3.32 3.64 3.32 3.62 3.35 3.32 3.32 3.65 3.54 3.82 3.85 4.01 3.88 4.18 3.96 5.81 4.30 4.43 4.37 5.48 4.45 4.79 4.63 5.74 5.41 6.28 5.58 4.95 5.93 5.12 4.99 5.65 5.35 6.20 5.18 3.64 4.95 430 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA Chart 75. Ratio of the Gross Earnings , Net Earnings , and Dividend3 OF THE National Banks to their Capital and Surplus. 1890 - 1911. Divide:no5 12 14- y /- - 12 A A / 10 8 6 4 2 / \J K 'V ^ ^ r 10 8 6 4- 2 ^ ^ ^ ) "^ i '\. . — \ — > .-' ^ , X' •-.. "••■«. "— ... \ ••■.. V- "^.r. ^C .T.»^ /~ 1 .•.,..* ' \ .—..?■ \ .-•J Y' — y' 1890 '91 '32 "93 '94 '93 '96 'Sl '96 "99 1900 "Ol "02 'OS "04 '05 "06 '01 '08 "09 1910 "ll debts were $10,000,000 above the average prevailing theretofore. And during the dull years which followed the banks were unable to maintain their gross earnings at the accustomed ratio. On the contrary, their losses continued heavy during the whole period of depression, and they could not reduce expenses and taxes below the level of the years before the panic. Hence net earnings suffered a loss much more severe than did gross earnings. This reduction in net profits, indeed, was so severe as not only to stop the investment of fresh capital in national banks, but also to cause a withdrawal of many millions of capital formerly invested. Nevertheless, the losses suffered by the banks in the period of depression were by no means equal to the losses suffered by the railways. This greater stability of banking as compared with railway profits showed itself again when prosperity returned; but this time to the disadvantage of the banks. After 1897 both gross and net earnings began to increase, but it was not until the half-year September 1, 1899, to March 1, 1900, that the ratio of net earnings to capital and surplus equalled the record set in 1890-91. From this time forward, however, the level of fluctuation in banking profits was decidedly higher than it had been in the preceding decade. The "rich man's MITCHELL: BUSINESS CYCLES 431 panic" gave the banks a period of keen anxiety and reduced their earnings for a time, and the crisis of 1907 increased their losses through bad debts. But the lowest level of profits touched in these lean years was well above the figures of 1893-97, and the large profits made in the fat years 1901-03 and 1905-07 set records much above the figures of 1890-91. And these larger profits attracted a rapidly increasing volume of capital into the business of banking under the national law.^ 3. German Corporations Although close comparisons between the foregoing figures for the railways and the national banks are precluded by the dissimilarity between the two sets of data, it seems certain that bank profits and railway profits feel the effect of changes from prosperity to depression in unequal measure. To decide which set of figures gives the truer index of the relationship between profits and business cycles for the purposes of a general discussion, or to determine whether the situation in different industries can safely be represented by any average or type, would be impossible if we were confined to the scanty American data. It is therefore fortunate that the efforts of certain German students to con- struct uniform statistics of profits for many industries afford a wider basis for conclusions.^ Among these contributions, Wagon's book on the financial development of German corporations in 1870-1900 is most serviceable for the present purpose.^ It is based primarily upon the annual reports of the joint-stock companies listed on the Berlin exchange, and covers nearly forty industries. The tables for most of these industries show (1) the number of companies for which reports are used, (2) their share-capital, (3) loans, (4) reserves, (5) net profits, (6) losses, and (7) dividends. Of these data, only the rate of net profits left after the deduction of losses, and the rate of dividends are reproduced in the next table for the years 1890-1900. As a rough gauge of the scope of the data for each industry, the average number of companies and the average capital 2 Another interesting bit of evidence has been supplied by Professor E. S. Meade. He has computed the net earnings from operations of twenty-nine industrial "trusts" in the United States, and reduced the data to an index number on the basis, profits of 1902 = 100. The results are as follows: 1902 100.0 1907 134.8 1903 103.5 1908 111.8 1904 92.2 1909 122.7 1905 104.6 1910 137.7 1906 124.1 He adds that the figures for 1911 are not yet available, but that they will undoubtedly show a considerable decline. "The Economies of Combination," Journal of Political Economy, April, 1912. 3 The German literature upon the subject is reviewed by Professor W. J. Ashley, in ' ' The Statistical Meas- urement of Profit," Economic Journal, December, 1910. J. von Koriisi's statistical investigations into the profits of joint-stock companies domiciled in Buda-Pesth gave the impetus to and set the model for the subsequent workers. * Eduard Wagon, Die pnanzielle EntwicMung deutcher Aktiengesellschaften von 1870-1900. (Sammlung na- tionaliikonomischer und statistischer Abhandlungen des Staatswissenschaftlichen Seminars zu Halle.) Jena, 1903. 432 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA TABLE 123 Ratios op Net Profits and of Dividends to Share Capital in Thirty-Seven German Industries, According to Wagon By Yeabs, 1890-1900 nSt peofits Iron Coal mining mining and smelting Metal industries Machinery Building materials Salt works Glass Porcelain Chemicals Electricity 1 2 3 4 5 6 7 8 9 10 Average number of . 34 51 30 46 21 6 3 4 19 10 enterprises . Average aggregate . 64.4 98.0 18.2 28.6 12.8 8.1 4.3 1.3 27.5 33.6 capital' 1890 17.85 9.10 10.52 12.40 11.04 10.41 12.53 14.82 17.49 10.51 1891 16.38 7.74 8.05 12.06 7.93 5.92 9.53 15.28 16.17 9.82 1892 8.55 5.06 7.89 10.04 5.90 3.93 9.74 13.07 16.93 8.88 1893 5.66 4.84 7.24 7.95 6.10 10.64 9.94 14.24 17.71 8.51 1894 4.99 3.57 12.62 8.91 8.43 11.18 9.60 12.85 16.49 9.29 1895 7.00 4.99 14.99 10.97 10.12 9.85 11.18 13.07 14.58 12.29 1896 9.07 7.45 12.66 12.75 11.78 10.56 12.77 20.41 14.60 12.45 1897 11.28 11.24 15.56 14.73 12.73 11.34 12.56 18.93 12.56 13.09 1898 11.66 12.17 15.56 13.94 12.39 12.29 12.95 19.77 14.92 10.50 1899 12.40 15.14 13.72 15.42 17.47 12.43 14.79 14.26 15.33 11.85 1900 17.74 13.62 9.86 12.91 14.13 DIVIDENDS 13.26 17.91 15.44 14.44 11.25 1890 13.82 7.17 8.48 9.06 8.70 8.60 10.50 14.00 13.04 8.09 1891 13.40 6.76 7.32 9.48 6.51 5.17 8.26 12.50 11.91 7.78 1892 7.29 4.75 7.25 8.28 4.83 5.38 8.35 11.00 12.59 7.41 1893 4.52 4.04 6.51 7.47 4.77 7.03 8.26 10.90 12.21 8.42 1894 4.36 4.19 9.15 6.67 6.66 8.53 8.38 10.34 11.99 9.08 1895 6.27 4.31 10.55 8.48 7.88 5.73 9.37 12.71 1.48 9.16 1896 7.93 6.13 12.70 9.33 9.63 7.33 10.71 13.98 10.77 8.38 1897 9.94 9.03 11.64 10.29 10.21 8.49 10.74 13.10 10.76 9.87 1898 10.22 9.95' 11.88 10.25 8.35 9.04 11.12 13.36 11.33 7.70 1899 10.79 11.97 10.58 11.48 13.17 9.16 12.05 10.50 12.27 9.06 1900 1462 10.97 7.30 10.96 9.21 10.19 14.08 10.55 11.14 8.64 ^ In millions of dollars. MITCHELL: BUSINESS CYCLES 433 Ratios of Net Profits TABLE 123— (Continued) AND OF Dividends to Share Capital in Thirtt-Seven German Industries, According to Wagon By Tears, 1890-1900 NET PROFITS Paper Rubber Lumber Milling Building Printing Miscellaneous Gas Water 11 12 13 14 15 16 17 18 19 Average number of enterprises . Average aggregate capital' 10 4.4 8 3.3 2 1.7 8 4.2 30 25.1 2 0.6 9 5.5 4 6.3 3 3.3 1890 22.83 20.44 7.72 7.85 5.16 7.86 10.40 11.34 9.30 1891 10.88 14.38 7.95 15.92 7.54 3.55 8.36 10.16 8.94 1892 13.37 17.18 4.83 5.98 5.74 5.28 2.87 9.80 9.35 1893 15.88 17.45 ;, , f- 4.91 5.88 4:.22 1.56 5.86 10.81 7.34 1894 16.01 14.04 6.67 4.29 3.92 6.66 8.68 11.79 9.78 1895 14.24 14.95 7.72 6.48 4.36 8.23 11.65 13.00 11.38 1896 19.30 19.50 8.34 8.25 3.60 3.36 43.94 13.48 12.25 1897 18.49 18.37 8.33 7.89 4.18 4.51 39.00 15.02 12.81 1898 15.80 12.58 8.32 7.50 4.62 8.34 20.81 13.11 14.10 1899 19.69 7.28 6.51 3.86 5.38 7.60 19.25 14.17 12.19 1900 13.65 14.52 5.43 5.06 4.45 9.38 13.77 14.45 12.67 DIVIDENDS 1890 10.36 17.04 6.50 6.61 2.95 6.67 7.42 8.25 8.50 1891 7.45 11.70 6.50 11.75 4.76 4.74 6.27 8.19 7.50 1892 7.32 13.93 4.00 6.08 3.93 4.44 4.55 8.15 8.20 1893 10.07 14.64 4.00 4.17 3.58 2.44 4.62 8.18 5.94 1894 9.31 11.57 5.50 4.16 3.34 4.99 6.02 8.18 8.61 1895 8.87 12.24 6.00 5.63 3.35 6.64 8.35 8.27 10.04 1896 11.90 14.98 6.43 6.85 2.97 2.57 17.87 9.05 11.08 1897 12.68 14.17 6.52 6.32 3.43 5.50 12.92 8.88 11.55 1898 11.26 11.37 6.39 5.67 3.49 6.34 16.05 8.55 11.33 1899 10.67 7.37 5.35 5.46 4.49 6.21 14.36 9.41 11.10 1900 10.16 11.77 4.45 4.30 4.22 8.50 13.46 9.65 11.02 •In millions of dollars. 434 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE 123— (Continued) Ratios or Net Profits and of Dividends to Share Capital in Thirty-Seven German Industries, According TO Wagon By Years, 1890-1900 Cloth 20 Spinning and weaving 21 Sugar 22 NET PROFITS Brewing Distilling 23 24 Poods 25 Baths 26 Railways 27 Land transport without rails 28 Average number of enterprises Average aggregate capital* 1890 11 5.2 4.14 22 14.0 8.00 7 4.7 7.00 49 25.3 8.42 2 1.3 4.67 4 1.9 8.86 2 0.1 4.57 24 66.7 6.80 5 2.0 10.08 1891 3.07 5.20 8.39 6.87 4.67 5.48 4.88 6.33 9.89 1892 4.31 4.60 8.29 7.71 4.73 3.00 5.58 6.07 11.27 1893 8.58 8.53 8.63 9.49 6.44 3.41 5.61 11.25 13.31 1894 5.80 5.38 7.45 9.35 11.87 3.80 6.45 6.10 13.82 1895 10.23 10.55 5.14 11.54 16.39 9.97 5.85 5.99 13.36 1896 10.82 11.86 12.06 12.38 16.46 14.24 5.62 7.79 12.03 1897 6.35 8.52 14.35 12.96 17.38 12.84 3.97 7.42 6.59 1898 7.39 8.68 11.57 10.90 16.20 14.76 5.03 7.15 11.59 1899 21.45 9.04 16.11 11.12 8.97 15.56 4.16 6.48 12.09 1900 —15.63 7.29 17.05 11.21 16.41 12.42 6.41 6.68 5.15 DIVIDENDS 1890 5.04 6.54 5.65 6.95 4.00 5.02 3.90 3.77 7.80 1891 1.40 4.98 6.99 6.17 4.00 4.49 4.22 3.46 7.89 1892 3.33 5.10 5.58 6.41 4.00 2.67 4.49 3.23 9.35 1893 5.87 6.72 5.78 7.95 5.00 2.67 4.92 4.48 10.81 1894 4.63 4.98 4.91 7.43 7.00 3.26 3.14 4.20 11.07 1895 7.41 8.09 5.34 8.62 10.93 6.99 4.81 4.98 11.09 1896 7.97 8.04 8.55 9.75 10.90 9.14 4.41 4.52 9.98 1897 4.97 6.20 8.51 9.67 11.36 8.81 3.39 4.76 8.49 1898 6.61 6.42 8.87 9.42 9.41 12.10 3.67 4.60 7.46 1899 11.04 6.73 11.45 9.11 4.64 10.19 3.67 4.80 9.83 1900 2.65 6.34 13.12 9.76 13.64 8.52 5.00 4.58 6.22 'In mill ions of dollars. MITCHELL: BUSINESS CYCLES 435 TABLE 12S— (Concluded) Eatios of Net Profits and of Dividends to Share Capital in Thirty-Seven German Industries, According TO Wagon By Years, 1890-1900 NET PROFITS Land transport on rails 29 Inland navigation 30 Marine navigation 31 Insurance Life 32 Fire 33 Hail 34 Re-insurance 35 Trans- ^ portation 36 Banking 37 Average number of enterprises 19 3 5 23 29 5 33 46 145 Average 1 aggregate r capital' 1 23.8 2.4 25.3 6.5 9.6 1.6 4.5 4.4 478.6 1890 9.09 5.42 8.39 45.36 32.89 10.80 19.37 21.88 11.06 1891 9.67 1.75 2.28 50.26 30.29 —44.43 21.89 15.78 8.82 1892 8.72 0.96 0.94 55.26 20.75 47.76 8.62 25.41 8.24 1893 7.66 2.30 1.98 59.20 16.46 70.57 9.21 22.03 8.48 1894 9.49 4.68 —2.36 71.26 33.31 41.96 26.13 23.74 8.28 1895 11.50 6.48 5.26 78.35 22.89 32.21 16.14 15.54 10.32 1896 13.14 3.12 11.99 73.75 36.84 —17.83 29.27 12.94 10.27 1897 10.22 4.71 16.23 87.34 34.17 23.79 29.56 19:43 9.90 1898 7.95 5.58 10.01 86.29 33.56 — 4.62 22.70 18.48 10.54 1899 7.62 7.88 10.35 94.54 15.24 2.45 4.06 11.92 11.27 1900 6.58 5.69 13.81 104.60 23.91 10.10 6.44 18.18 9.14 DIVIDENDS 1890 7.96 4.30 7.16 15.69 21.26 6.64 13.25 16.22 7.60 1891 7.08 2.39 2.20 14.02 20.48 1.18 13.45 15.24 6.50 1892 6.40 0.78 0.94 13.02 18.13 12.69 11.45 16.52 6.20 1893 6.58 1.75 1.83 12.93 15.92 20.56 8.00 16.50 6.25 1894 6.65- 3.38 0.18 13.68 21.65 18.67 13.03 16.09 6.74 1895 8.12 4.97 2.47 12.81 17.48 15.23 12.24 13.96 7.38 1896 9.28 2.64 4.05 12.81 22.32 4.31 14.58 13.44 7.63 1897 8.49 3.86 5.58 13.02 21.97 12.70 14.34 13.69 7.66 1898 6.73 4.51 7.47 12.79 22.48 8.67 14.19 12.64 7.89 1899 6.08 6.07 7.92 12.79 17.42 6.77 12.39 12.89 8.21 1900 6.21 4.71 9.43 12.96 19.32 8.70 10.46 13.09 7.49 ' In millions i of dollars. 436 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA for this eleven-year period are shown in the headings. The percentages of net profits and of dividends are computed by dividing the sums of the actual profits and dividends for all the companies included by the sums of their share capitals. But in the case of the insurance companies the divisor is the sums of the paid-up capitals. The practice prevalent in Germany of issuing shares at a premium makes the capital actually invested somewhat larger as a rule than the nominal share-capital on the basis of which profits and dividends are computed. Hence the figures overstate the profitableness of the actual investments. But this fact invalidates the following comparisons between the profits made in years of depression and in years of prosperity in relatively slight degree. On the other hand, the dividend rates understate the gains derived by shareholders, because they omit the gains from the privilege of subscribing to new issues of stock on terms more advantageous than those open to the general public. Finally, Wagon can offer no assurance of substantial uniformity in the methods of accounting followed by his different companies. Hence it is unsafe to base upon the figures any but broad and general conclusions concerning the trend of profits from one phase of the business cycle to the next. To compute the average rate of profits for the thirty-seven industries which are represented in Table 123 would be easy ; but the value of the results would be highly problematical. The general trend and the numerous divergencies are both indicated by the following statement of the number of industries which showed their highest and lowest rates of profits during each year of the business cycle which began with depression in 1891 and culminated in the crisis of 1900. Number of industries showing their lowest rate of profits in the corresponding highest rate of profits in the corresponding years years 1891 6 2 1892 9 1 1893 5 3 1894 i 1 1895 2 1 1896 1 7 1897 2 7 1898 1 1899 5 8 1900 3 6 37 37 Except 1898, every year of the whole cycle was both the year of the lowest profits for one or more industries and also the year of the highest profits of one or more other industries. The variety of the fortunes enjoyed by different MITCHELL: BUSINESS CYCLES 437 industries could hardly be shown more strikingly than by this fact. It is therefore clear that no single industry could safely be taken as typical of all. And yet the same figures unmistakably show a general trend. The early years of the decade were much less profitable for most industries than the years beginning in 1896. They also show that the early stages of business revival mark the highest level of profits for quite as many industries as the years when the movement culminates, and that as the crisis approaches an increasing number of industries find their profits falling to a low ebb. Concerning Wagon's data for dividends, it is sufficient to remark that they follow the rate of profits, but at a distance. Like the American railways and banks, the German industries of all kinds keep their dividends much more stable than their net profits — reducing the rates less than profits fall in unfav- orable seasons and raising them less than profits rise when times are good. Incidentally these figures show that in Germany as in America the business enterprises save large sums out of their current incomes and reinvest the money in their undertakings. One other piece of German evidence may be added — a table compiled by Dermietzel to show the general trend of dividends declared by joint-stock com- panies engaged in a number of industries. Here the capital of the companies is classified according to the rate of dividends paid, and close attention is necessary to understand the figures. During the depression of 1891-94 the TABLE 124 Nominal Capital of German Joint-Stock Companies Classified According to the Bate of Dividends Declared By Yeabs, 1890-1902 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 1902 0% 1.6 4.4 3.5 4.1 7.5 5.2 3.2 1.4 10.1 9.4 Kate of dividends declared 0-5% 5-10% 10-15% 15-20% 20-25% Percent of aggregate capital paying each rate of dividend 5.4 10.9 19.5 25.1 13.3 9.8 5.0 2.3 2.0 .4 8.0 21.8 16.9 54.8 69.1 66.2 62.4 65.9 62.9 66.9 65.3 61.1 59.8 62.1 47.8 54.9 31.4 10.3 8.5 7.7 12.6 20.3 21.2 25.9 29.8 31.5 22.4 17.4 15.1 4.9 3.5 1.6 1.9 1.1 1.1 3.1 5.2 5.7 6.1 3.3 .8 2.0 2.3 1.3 .9 25-30% 30-35% .7 .7 .7 .7 .7 2.2 .5 .5 .5 .3 .3 rnmnilpd from Otto Dermietzel Statistische Vntersuchwngen iiber die Eapitalrente der griisseren deutschen AUiengesellschaften (mU Ausschltiss der Eisenbahnen) von 1876-1902 (Gottingen, 1906) pp. 61-3. Includes no companies with nominal capitals of less than ten million marks. Banks are more fully represented than any other class of enterprises. 438 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA proportion of capital paying no dividends or low dividends is high. But when prosperity returned the proportion paying 10 per cent or more increased rapidly until 1899. The recession of prosperity in 1900 appears in a moderate falling off of the percentages of capital in the columns for the higher rates ; but it is not until 1901 that a severe depression is again indicated. II. Bankruptcies 1. The TJtiited States Two great commercial agencies, Bradstreet's and Dun's, regularly report the number and the liabilities of commercial enterprises which fail in the United States. That there are considerable discrepancies between their figures appears from the following table, in which the data compiled by the two agencies are arranged in parallel columns. As a rule, the number of failures reported by Dun is greater than the number reported by Bradstreet; but the contrary is true in 1891, 1893, and 1899. The liabilities differ more widely than the number of failures, and Bradstreet's figures are greater than Dun's about half the time. The cause of these discrepancies — apart from the difficulty of secur- ing, accurate information — is not altogether clear. Bradstreet's explains that its figures do not include failures of banks, professional men, farmers, stock- brokers, or real estate dealers, and that they do not include cases of "failure to succeed" which involve no less to creditors. Whether Dun's figures do include these classes is not known, because the figures are published without explanation of their scope. For the present purpose, however, these discrepancies are of little moment ; for the general conclusions suggested by the two sets of data are the same. (1) The number of failures declines in the earlier stages of prosperity, rises slowly as a crisis approaches, reaches its maximum during the months of the crisis, and, though declining, remains large during the period of depression. (2) The aggregate and the average liabilities of bankrupt firms show similar but more violent fluctuations. During years of prosperity, mismanagement and lack of capital account for the great bulk of business failures, and these diffi- culties are far commoner among small than among large firms. On the other hand, catastrophes resulting from business conditions beyond the control of the firms affected are relatively much commoner at times of crisis, and these difficulties affect both large and small enterprises without distinction. Hence the average liabilities of the firms which go to the wall always increase during a crisis. (3) Despite the larger number of firms in business during the second decade, both the number and the liabilities of the firms which failed were smaller than in 1890-99. The "business mortality rate" has dropped, unless MITCHELL: BUSINESS CYCLES 439 TABLE 125 Statistics op Commercial Failures in the United States, Compiled by Bradstreet 's and by Dun's Commercial Agencies "" By Years 1890 -1911 Number of failures Liabilities of firms which failed. In millions of dollars A Actual amounts Average liabilities of firms which failed Number of firms in business. In thousands % of firms in business which failed r Bradstreet Dun Bradstreet Dun r Bradstreet Dun Bradstreet Dun Bradstreet Dun 1890 10,700 10,900 $175 $190 $16,400 $17,400 989 1,111 1.07 .98 1891 12,400 12,300 193 190 15,600 15,500 1,018 1,143 1.21 1.07 1892 10,300 10,300 109 114 10,600 11,000 1,036 1,173 .99 .88 1893 15,500 15,200 382 347 24,600 22,800 1,059 1,193 1.46 1.28 1894 12,700 13,900 152 173 11,900 12,500 1,048 1,114 1.21 1.25 1895 13,000 13,200 159 173 12,200 13,100 1,054 1,209 1.23 1.09 1896 15,100 15,100 247 226 16,400 15,000 1,079 1,152 1.40 1.31 1897 13,100 13,400 159 154 12,100 11,600 1,086 1,059 1.20 1.26 1898 11,600 12,200 142 131 12,200 10,700 1,093 1,106 1.06 1.10 1899 9,600 9,300 120 91 12,400 9,700 1,126 1,148 .85 .81 1900 9,900 10,800 127 138 12,800 12,900 1,162 1,174 .85 .92 1901 10,600 11,000 130 113 12,200 10,300 1,202 1,219 .88 .90 1902 10,000 11,600 106 117 10,600 10,100 1,239 1,253 .80 .93 1903 9,800 12,100 154 155 15,800 12,900 1,273 1,281 .76 1.12 1904 10,400 12,200 144 144 13,800 11,800 1,308 1,320 .79 .92 1905 10,000 11,500 122 103 12,200 8,900 1,353 1,357 .73 .85 1906 9,400 10,700 127 119 13,600 11,200 1,401 1,393 .66 .77 1907 10,300 11,700 384 197 37,400 16,800 1,448 1,418 .70 .82 1908 14,000 15,700 296 222 21,100 14,200 1,488 1,448 .94 1.08 1909 11,800 12,900 141 155 11,900 12,000 1,543 1,486 .76 .80 1910 11,600 12,700 189 202 16,300 16,000 1,593 1,515 .72 .80 1911 12,600 13,400 188 191 14,900 14,200 1,638 1,525 .77 .81 Averages 1890-99 12,400 12,580 183.8 178.9 14,440 13,930 1,058.8 1,140.8 1.168 1.103 1900-09 10,640 12,020 173.1 146.3 16,140 12,110 1,341.7 1,334.9 .787 .911 440 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA TABLE 125— (Concluded) Statistics of Commekcial Failures in the United States, Compiled by Bradsteeet's and by Dun's Commercial Agencies By Tears 1890-1911 Relative amounts. Average actual amounts in 1890-99= 100 Number of failures A Liabilities of firms which failed A Average liabilities of firms which failed A Number of firms in business A Bradstreet Dun Bradstreet Dun Bradstreet Dun Bradstreet Dun 1890 86 87 95 106 114 125 93 97 1891 100 98 105 106 108 111 96 100 1892 83 82 59 64 73 79 98 103 1893 125 121 208 194 170 164 100 105 1894 102 110 83 97 82 90 99 98 1895 105 105 87 97 84 94 100 106 1896 122 120 134 " 126 114 108 102 101 1897 106 107 87 86 84 83 103 93 1898 94 97 77 73 84 77 103 97 1899 77 74 65 51 86 70 106 101 1900 80 86 69 77 89 93 110 103 1901 85 87 71 63 84 74 114 107 1902 81 92 58 65 73 72 117 110 1903 79 96 84 87 109 93 120 112 1904 84 97 78 80 96 85 124 116 1905 81 91 66 58 84 64 128 119 1906 76 85 69 67 95 80 132 122 1907 83 93 209 110 259 121 137 124 1908 113 125 161 124 146 102 141 127 1909 95 103 77 87 82 86 146 130 1910 94 101 103 113 113 115 150 133 1911 102 107 102 107 103 102 155 134 Averages : 1890-99 100 100 100 100 100 100 100 100 1900-09 86 96 94 82 112 87 127 117 MITCHELL: BUSINESS CYCLES 441 Chart 76. Relative. Number , Total Liabiuties , and Average Liabilities OF Commercial Firms wmicH Failed in the United States. Based Upon Bradstreet's Data 1890 - 1911. Number. Total Uabiuties Average Liabilities. zoo 190 180 no 160 150 140 •tso I 20 MO 100 2 50 240 230 220 190 180 no 160 150 140 130 120 110 100 90 80 70 60 1690 '9! '92 '93 '94 '95 '36 '91 "98 '99 1900 "01 'OZ '03 '04 'OS '06 '01 '08 '09 1910 '11 442 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA the figures are in error by a large margin. Even the rates for 1908, which show most clearly the influence of the crisis which came late in 1907, are less than the average for the first decade. To supplement the above statistics of commercial failures, there are available figures which show the disasters met by banks and by railwaj^s. The national- bank data, compiled by the Comptroller of the Currency, may be accepted without reservation; but the data for other banks are supplied by Bradstreet's TABLE 126 Bank Failures in the United States, Compiled by the Comptbollee of the Curbency and by Bradstreet's Commercial Agency By years ending October 31 for the National Banks, 1890-1911 By years ending June 30 for other than National Banks, 1892—1911 Actual figures Relative figures Average actual figures in 1890-99 or 1892-99 = 100 Number of failures Capital of insolvent National banks in thousands of dollars Liabilities of insolvent banks other than National in thousands of dollars Number of failures Liabilities of insolvent banks other than National National banks Other than National banks National banks Other than insolvent National National banks banks 1890 9 No data $ 750 No data 35 No data 20 No data 1891 25 No data 3,622 No data 97 No data 97 No data 1892 17 69 2,450 $11,025 66 73 65 50 1893 65 414 10,935 97,193 253 439 292 442 1894 21 65 2,770 44,901 82 69 74 204 1895 36 85 5,235 15,912 140 90 140 72 1896 27 110 3,805 9,174 105 117 102 42 1897 38 122 5,852 24,091 148 129 156 110 1898 7 53 1,200 7,080 27 56 32 32 1899 12 26 850 10,447 47 28 23 48 1900 6 32 1,800 11,421 23 34 48 52 1901 11 56 1,760 13,335 43 59 47 61 1902 2 43 450 10,333 8 46 12 47 1903 12 26 3,480 4,006 47 28 93 18 1904 20 102 1,535 31,775 78 108 41 145 1905 22 57 2,035 10,273 86 60 54 47 1906 8 37 680 7,188 31 39 18 33 1907 7 34 775 22,165 27 36 21 101 1908 24 132 5,560 209,836 93 140 148 955 1909 9 60 769 25,190 35 64 21 115 1910 6 28 875 18,182 23 30 23 83 1911 3 56 275 18,547 12 59 7 84 Averages ; 1890 or 92- -99 25.7 94.4 3,746.9 21,982.3 100 100 100 100 1900-1909 12.1 57.9 1,884.4 84,552.2 47 61 50 157 From the Reports of the Comptroller of the Currency. MITCHELL: BUSINESS CYCLES 443 Commercial Agency, and are subject to an uncertain margin of error, partic- ularly with reference to the liabilities. In all essential respects, this table for the banks supports the conclusions based upon the table for commercial failures. One exception may be noted — the liabilities of the banks other than national which failed in the second decade exceed the corresponding liabilities for 1890-99. But this exception results almost wholly from the catastrophe of one great institution which collapsed in the panic of 1907 — the Knickerbocker Trust Company. The number of bank failures in 1893 was much greater than the number in the later panics ; but in 1893 the failures were mainly among the small banks of the South and West, while in 1907 several large banks in New York City went to the wall. TABLE 127 Eailway Eeceiverships and Fokeclosures According to the Sailway Age By Years, 1890-1911 Relative figures Actual fi Placed under receivership Stocks Number and of roads Miles bonds^ gures Sold under foreclosure A Average actual figu Placed under receivership Stocks Number and of roads Miles bonds resin 1890-99 = 100 Sold under foreclosure Number of roads Miles Stocks and bonds* Number of roads Miles Stocks and bonds 1890 26 2,963 105 29 3,825 182 84 45 29 77 64 48 1891 26 2,159 84 21 3,223 169 84 33 23 56 54 45 1892 36 10,508 358 28 1,922 96 116 159 98 74 32 25 1893 74 29,340 1,781 25 1,613 80 238 444 488 66 27 21 1894 38 7,025 396 42 5,643 319 122 106 108 112 94 84 1895 31 4,089 369 52 12,831 762 100 62 101 138 215 201 1896 34 5,441 276 58 13,730 1,150 109 82 76 154 230 303 1897 18 1,537 93 42 6,675 518 58 23 26 112 112 136 1898 18 2,069 139 47 6,054 253 58 31 38 125 101 67 1899 10 1,019 52 32 4,294 268 32 15 14 85 72 71 1900 16 1,165 78 24 3,477 190 51 18 21 64 58 50 1901 4 73 2 17 1,139 86 13 1 1 45 19 23 1902 5 278 6 20 693 40 16 4 2 53 12 11 1903 9 229 19 13 555 16 29 3 5 35 9 4 1904 8 744 36 13 524 28 26 11 10 35 9 7 1905 10 3,593 176 6 679 20 32 54 48 16 11 5 1906 6 204 55 8 262 10 19 3 15 21 4 3 1907 7 317 14 6 114 14 23 5 4 16 2 4 1908 24 8,009 596 3 138 3 77 121 163 8 2 1 1909 5 859 78 12 2,629 250 16 13 21 32 44 66 1910 7 735 51 17 1,100 94 23 11 14 45 18 25 1911 5 2,606 211 13 1,386 41 16 39 58 35 23 11 Averages 1890-99 31.1 6,615.0 365.3 37.6 5,981.0 379.7 100 100 100 100 100 100 1900-1 D9 9.4 1,547.1 106.0 12.2 1,021.0 65.7 30 23 29 32 17 17 ^ In millions of dollars. 444 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Railway receiversMps follow the same rules as commercial and bank failures, except that they lag a little further behind the change in business conditions. A railway is not taken out of the hands of its owners quite so promptly as a commercial firm or a bank when its inability to meet its creditors is made apparent. The months following a crisis accordingly show the largest numbers of railway failures, while proportionately more banks are closed and commercial firms declared bankrupt during the crisis itself. Foreclosure sales of railways, which do not occur until the inability of the stockholders to reor- ganize a railway already in the hands of a receiver has been demonstrated, of course lag still further behind crises. 2. England, France, and Germany The European statistics of failures are meager in comparison with the American. For England and Wales there is shown the number of debtors adjudicated bankrupt, of schemes of arrangement and of compositions with creditors under the acts of 1883 and 1890, and of orders for the administration of deceased debtors' estates. Since the statistics thus refer to cases of which the courts have taken cognizance, their accuracy is open to little doubt so far Chart 77 Relative: Number of Failures in England , France , and Germany. 1890 - 1909 160 i » 1 \ 150 ( % • • , -— — France. • » • 140 Germany. • • ••. / • • 130 > • • ••• ._ 130 I *• r 120 « • ISO 1 110 100 90 y • 110 100 "''/ / * / I > / / f * > • \^ / / > k 7 '— • f: \ ^ ^ \ / \ s 7 \ 1890 91 '92 '93 "94 '95 '9G '97 '96 '99 1900 'oi "02 '05 '04 '05 '0€ "01 'Ofl '09 MITCHELL: BUSINESS CYCLES 445 as they go, but there may be many more cases of failures settled out of court. The French data used include both the "judicial liquidations" and the "failures" so called. Finally, the German figures are described simply as showing the number of "new bankruptcies occurring each year." In England only are the liabilities shown. The actual numbers of failures occurring during any given time in the three countries cannot properly be compared with each other, because of differences in the bankruptcy laws ; but there seems to be no reason why general comparisons should not be made between the fluctuations in the numbers from one vear to the next. TABLE 128 Statistics of Commercial Failuki:s IN England, France , AND GeR MANY By Years, 1890-1911 Number of failures A Liabilities which fa England a: Actual amounts^ Actual numbers Relative numbers Average actual numbers 1890-99=100 lin of firms iled in nd Wales Relative amounts' England ■ and Wales France Germany England and Wales France Germany^ 1890 4,040 8,570 No data 92 97 No data 30.1 89 1891 4,240 8,580 7,620 97 97 105- 41.9 124 1892 4,660 8,590 7,680 107 97 106 43.3 128 1893 4,900 8,420 6,730 112 95 93 36.7 109 1894 4,790 9,170 7,410 110 104 102 34.2 101 1895 4,415 8,550 7,110 101 . 97 98 31.9 95 1896 4,170 8,620 6,760 95 " 98 93 28.8 85 1897 4,098 8,970 7,000 94 102 96 28.1 83 1898 4,310 9,580 7,360 99 -109 101 33.2 99 1899 4;111 9,180 7,740 94 104 106 28.8 85 1900 4,410 9,290 8,560 101 105 118 31.5 93 1901 4,244 8,930 10,570 97 101 145 33.1 98 1902 4,202 8,990 9,830 96 102 135 27.1 80 1903 4,286 8,710 9,630 98 99 132 25.9 77 1904 4,546 9,760 9,510 104 111 131 33.9 101 1905 4,764 9,500 9,360 109 108 129 28.8 85 1906 4,436 8,930 9,400 101 101 129 28.0 83 1907 4,111 8,106 9,860 94 92 136 27.6 82 1908 4,306 11,570 98 159 26.8 80 1909 4,070 11,005 93 151 28.2 84 1910 3,880 10,783 89 148 40.0 119 1911 3,742 86 33.3 99 Averages 1890-99 4,373 8,823 7,268 100 100 100 33.7 100 1900-09 4,338 9,930 99 137 29.1 86 ^ Average actual amounts in 1891-99 = 100. " In millions of dollars. 'Average actual amounts in 1890-99 = 100. Compiled from the Statistical Abstracts of the several countries. 446 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA These fluctuations are much more marked in Germany than in England or France. As several of the previous tables have indicated, German business shows most of the phenomena of business cycles in more accentuated form than French and English business. In the present case Germany equals, if she does not surpass, the United States in instability. The chief differences between these two countries with respect to the fluctuations in number of fail- ures grow out of the dissimilarity in the chronology of their business cycles. 1893 did not bring a severe crisis in Germany, 1900 did not bring one in the United States. Even the higher level of the German fluctuations in the second decade and of the American fluctuations in the flrst decade may be traced to this difference in business history. The English figures are peculiar in that they make the largest number of failures occur toward the end of a period of depression, instead of during a crisis like the American and German figures. It may be that the judicial source of the English data has some bearing upon this difference; but the known promptness of the British courts disposes one to regard this suggestion as of slight moment. A more important cause of difference is the relative conserv- atism of British business and the ability of British banks to provide adequate accommodation for their borrowers in seasons of stress. But no banker can ward off business failure which results from inability to secure sufficient trade to make profits. Of course failures from this latter course are most numerous at the end of several years of depression, when a firm's powers of resistance to bankruptcy have been gradually exhausted. Finally, the French statistics for failures, like most of the other gauges of economic activity which have been examined hertofore, are less influenced by business cycles than the American, German, or British statistics. Indeed, one who studied the present table only would go quite astray in dating the crises which have occurred in Prance since 1890. For some reason, which a fuller knowledge of the scope of the data might disclose, the largest number of failures occurred in 1898, a highly prosperous year, and in 1904, when business was on the eve of a revival of activity. But the most remarkable and most character- istic feature of the French figures is their evenness. If business "booms" are less intense in France than elsewhere, epidemics of bankruptcy are less severe. PART III THE RHYTHM OF BUSINESS ACTIVITY THE FRAMEWORK OF PART III The review of recent theories concerning business cycles in Part I of this book and the statistical study of the phenomena of recent cycles in Part II have a common purpose — to provide suggestions and materials for attacking the problem of Part III. This problem is to account for the rhythmical alter- nations of prosperity, crisis, and depression which occur in the modern business world. Now the recurrent phases- presented by economic activity, wherever it is dominated by the quest of profits, grow out of and grow into each other. An incipient revival of activity, for example, develops into full prosperity, pros- perity gradually breeds a crisis, the crisis merges into depression, depression becomes deeper for a while, but ultimately engenders a fresh revival of activity, which is the beginning of another cycle. A theory of business cycles must therefore be a descriptive analysis of the cumulative changes by which one set of business conditions transforms itself into another set. The deepest-seated difficulty in the way of framing such a theory arises from the fact that while business cycles recur decade after decade each new cycle presents points of novelty. Business history repeats itself, but always with a difference. This is precisely what is implied by saying that the process of economic activity within which business cycles occur is a process of cumu- lative change. It follows that a thoroughly adequate theory of business cycles, applicable to all cases, is unattainable. Even if some one cycle could be fully accounted for, the account would necessarily be inaccurate with reference to cycles which were the outgrowth of earlier or of later conditions. Nor are all the differences between the successive cycles of one country and between the contemporary cycles of several countries differences in minor detail. Even such an elemen- tary matter as the order in which the phases of a business cycle succeed one another is not invariable. A revival of business activity does not always develop into prosperity — sometimes it relapses into depression. Such devia- tions from the usual course of events occurred in the United States in 1892, 1895, and 1910. A situation of intense strain, presenting the phenomena of crises, sometimes follows a period of depression, instead of following a period of prosperity ; for example, the American stringency of 1896. It is needless to labor the point, however, for random references to the preceding chapters will [449] 450 MEMOIRS OP THE UNIVERSITY OP CALIPORNIA show that the points of difference between any two periods of prosperity, of crisis, or of depression are scarcely less numerous than the points of similarity. Every business cycle, strictly speaking, is a unique series of events and has a unique explanation, because it is the outgrowth of a preceding series of events, likewise unique/ The theory of business cycles, however, need not be given up in despair because it cannot satisfy ideal requirements. The purposes which scientific theory serves are met by explanations which stop far short of radical thor- oughness. Much would be gained for the conduct of individual affairs and the guidance of legislation could we single out from the maze of sequences among business phenomena a few which are substantially uniform. For these sequences could be used with a degree of confidence depending upon the regu- laritj" with which they recur as guides in forecasting the immediate business future. They could also serve as centers for organizing our knowledge con- cerning the variable sequences, and as points of departure in search for new uniformities. Such regular sequences would help us to break up the tangled mass of facts presented by direct observation into coherent clusters. The latter would stimulate the imagination to unravel various lines of ca/§(i^al connection which are jumbled together in the annals of business and in the tables of statistics. Then it might be found that the irregularity of other sequences arises from varying combinations among sequences themselves regular. The first aim of the descriptive analysis of business cycles, then, must be to look for the sequences which occur in every period of revival, of prosperity, of crisis, or of depression. But the search need not be confined to the phe- nomena revealed by the preceding chapters. The various lines of thought suggested by what lies on the surface may be followed boldly in the hope of discovering further uniformities which are obscured by being tangled together. These speculations, however, must be submitted to the pragmatic test. That is, they must be used in attempting to interpret the known phenomena of business cycles, and judged by the aid which they render the mind in its effort to create order amidst the confused facts of observation. As Chapter II provided the framework into which the statistical chapters of Part II were fitted, so it provides also the framework for the descriptive analysis of Part III. Since the quest of money profits by business enterprises is the controlling factor among the economic activities of men who live in a money economy, the whole discussion must center about the prospects of profits. On occasion, 1 If theory is to be taken seriously as seeking to give really adequate understanding, it must be admitted that even this unique explanation of any single cycle cannot be completely worked out. For, obviously, analysis can never be carried back to the beginning of the chain of events which eventuated in any cycle, and con- cerning even the proximate events it is obviously impossible to collect all the relevant information. Further the intellectual instruments of analysis are unequal to the complex problem of handling simultaneous varia- tions among a large number of inter-related functions. MITCHELL: BUSINESS CYCLES 451 indeed, this central interest is eclipsed by a yet more vital issue — the avoidance of bankruptcy. But to make profits and to avoid bankruptcy are merely two sides of a single issue — one side concerns the well-being of business enterprises under ordinary circumstances, the other side concerns the life or death of the same enterprises under circumstances of acute strain. Whatever affects profits and solvency, then, comes within the sweep of the analysis. And we already know the factors of chief significance: the prices which constitute business receipts and the prices which constitute business expenses, the volume of sales effected at the prevailing margins of profit, the need of having currency to make payments, and the need of securing loans in adequate amount from banks and investors. But to know what these factors are, and even to know what fluctuations they undergo in severalty, is but half of the battle. The other and the harder half is to follow the interactions of these factors through all the permutations which brighten or darken the pros- pects of profits and make easy or difficult the maintenance of solvency. Since the processes of a nation's business life never cease or begin afresh, there exists no natural starting-point for the descriptive analysis to which we are committed. It is necessary to plunge in medias res by breaking into the unceasing processes at some arbitrarily chosen point. The grave disadvantage of this procedure is that the whole situation from which we start must be taken for granted. But, by following the interlacing processes forward through their successive phases we can work round again to our point of departure, and account for our original assumptions in the only way in which we can account for any of the intermediate phenomena — that is, by tracing the pro- cesses of cumulative change by which one set of business conditions gradually evolves into quite a different set. The starting-point chosen is that stage of the business cycle in which activity begins to quicken after a period of depression. How the characteristic features of this stage are evolved by the depression itself is the topic which will be treated last of all. CHAPTER X THE CUMULATION OF PROSPERITY I. The Beginnings of Revivals in Business Activity Since 1890 the United States has had five seasons of business revival fol- lowing upon periods of business depression : the midsummer of 1891, the spring of 1895, the midsummer of 1897, the autumn of 1904, and the winter of 1908-09.' In England, Prance, and Germany similar revivals occurred in 1895, 1904-05, and 1909.' v/ The conspicTjX LUs agent in rousing business from its partial l ethargy has often been some propitious event. For example, highly profitable crops of grain served as occasions for the American revivals of 1891 and 1897 ; President Cleveland's contract with the Morgan-Belmont syndicate for the defense of the gold reserve started the revival of 1895 ; an increase in the export demand for British commodities stimulated English trade in 1905 and .1909 ; and the extraordinary development of the electro-technical and chemical industries led the way in the Oerman revival of 1895.^ v/ But, with one striking exception, these propitious events did no more than to hasten a process of business recuperation already under way. To show how the very conditions of business depression beget a revival of activity is a task reserved for Chapter XIII; but certain results of this later investi- gation may be anticipated. Among the ultimate effects of a period of hard \/ times, then, are the following: a lessening in the prime and supplementary costs of manufacturing commodities, a reduction in the stocks of goods held by wholesale and retail merchants, a liquidation of business debts, low rates of interest, a banking position which favors an increase of loans, and an increasing demand among investors for corporate securities. Xow all of these conditions are conducive to a resumption of business activity, either because (like the settling of old accounts) they remove obstacles, or because (like the reduction of mercantile stocks) they promise a larger demand for wares, or because (like low interest and Ioav manufacturing costs) they widen the margin of profit, 1 The quickening of activity in the autumn of 1900 hardly deserves to be included -in this list, because the preceding slackening of activity had been so mild, so restricted, and so brief. - See the sections of Chapter III relating to these years. 3 Again see the relevant sections of Chapter III. [452] , MITCHELL: BUSINESS CYCLES 453 or because (like the position of the banks and the attitude of investors) they facilitate the borrowing of capital. Fundamentally, the revivals of business must be ascribed to the processes which beget these favorable conditions. The one exception to this rule which has occurred in the history of our four countries within a period of more than twenty years is afforded by the harvest episode of 1891. Exceptionally large American crops of grain, sold at exceptionally high prices, cut short what promised to be an extended period of liquidation after the crisis of 1890 and suddenly set the tide of business rising. But in this single case the revival proved both partial in its scope and brief in its duration, partly at least because the stresses which had led to the crisis were not relaxed in the period of depression." Over against this single instance are set several instances in which revival began quietly without the occurrence of any propitious event sufficiently striking to impress itself upon the attention of contemporary chroniclers. Such was the case, for example, with the German revival in 1904-05, and with all the French revivals since 1890, The attempt to account for business revivals as the results of happy accidents therefore deserves no more credence than the abandoned theory that crises are "pathological" phenomena due to some "abnormal" cause. The quiet processes of business recuperation during dull times are quite competent to develop into revival without the adventitious help of any "disturbing cir- cumstance." II. The Diffusion of Bushstess Activity 1. The Increase in the Demand for Commodities Once started, a revival of activity spreads rapidly over a large part, if not over the whole, of the field of business. For, even when the first impulse toward expansion is sharply confined to a single industry or a single locality, its effects in the restricted field stimulate activity elsewhere. In part this diffusion of activity proceeds along the lines of interconnection among business enterprises which were traced in Chapter II. One line leads back from the industries first stimulated to the industries which provide raw materials and supplementary supplies. Another line leads forward to the chain of enterprises which handle the increased output of commodities. Still other lines, of less importance for the transmission of the stimulus, radiate to the industries which deal in complementary or substitution goods. Of course the particular trades which receive an early share in the revival are those which stand in the most intimate relations with the trade which happens to be the first center of business expansion. But, since every important industry requires transportation and bank accommodation, the railways and the banks which * See Chapter III, iii, 1 and 5. V 454 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA serve the locality affected are always among the early beneficiaries. Among other trades coal mining has the best chance of profiting promptly. As the industries which cater to the business needs of the enterprises from which activity radiates receive a stimulus, so also do the industries which cater to the personal needs of the families interested in the flourishing enterprises. Larger earnings for the employes and higher profits for the proprietors enable both classes to pay such debit accounts as they may have run up during the period of depression and to enlarge their current purchases. The statistics of consumption are too fragmentary to give much aid in following this process;^ but current trade reports justify the belief that even the staple articles of food find a somewhat larger sale when business improves, and that better qualities are freely substituted for the poorer which were bought so long as severe economy was compulsory. The demands for clothing, furniture, amusements, and luxuries of all kinds are doubtless affected in larger degree than the demand for food, because purchases of such goods can be given up, diminished, or deferred in seasons of depression with less discomfort. While retail shopkeepers are the first beneficiaries of the increasing con- sumers' demand, they are compelled to place fresh orders promptly with whole- sale merchants, because they have let their stocks run low during the dull times. Since the wholesale merchants have pursued the same policy, they are like- wise prompt in placing fresh orders with the manufacturers. Thus the whole chain of trades engaged in furnishing consumers' goods soon feels the stimu- lating effect of a revival of business, no matter in what locality or industry it starts. And each enterprise which finds its own trade increasing becomes an agency in extending activity to still other enterprises — those from which it buys producers' goods, and those which supply consumers' goods to its own personnel. At first the impetus toward business expansion grows weaker as it spreads out from its original center to the branches of business which furnish it with producers' and consumers' goods. For the latter classes of enterprises have customers engaged in several or in many industries, or customers living in many sections of the country, so that an increase of say 5 per cent in the sales to one set of customers means an increase of much less than 5 per cent in the total volume of sales. But, on the other hand, the impetus is cumulative. If the steel trade makes more business for the railway, the railway presently increases its orders for steel, and thus sets the process working afresh at a higher pitch of intensity. Thus the revival gathers momentum as the industries which receive a mild stimulus one after the other begin to react upon those in which the movement started. 5 Compare Chapter V, section vi. MITCHELL: BUSINESS CYCLES 455 2. The Development of Business Optimism The diffusion of activity is not confined to these- definite lines of intercon- nection among business enterprises. It also proceeds by engendering an opti- mistic bias in the calculations of all folk who are concerned with the active direction of business enterprises and with the providing of loans. Practically all business problems involve elements which are not precisely known, but must be approximately estimated even for the present, and forecast still more roughly for the future. Probabilities take the place of certainties, both among the data upon which reasoning proceeds and among the conclusions at which it arrives. This fact gives hopeful or despondent moods a large share in shaping business decisions. A mathematician's mood exercises no influence upon his solution of an algebraic equation ; but it does affect his opinion about the advisability of buying the bonds which are offered him. While these emotional states are largely the product of strictly individual conditions — such as the state of digestion — they are also in part the product of suggestions received from the demeanor, the talk, and the actions of asso- ciates. Most men find their spirits raised by being in optimistic company. Therefore, when the first beneficiaries of a trade revival develop a cheerful frame of mind about the business outlook, they become centers of infection, and start an epidemic of optimism. Perhaps the buoyancy of a grocer gives a lumber dealer no adequate reason for altering his conservative attitude toward the business projects upon which he must pass. Yet, in despite of logic, he will be the readier to buy if his acquaintances in any line of trade have become aggressively confident of the future. The fundamental conditions affecting his own business may remain the same ; but his conduct is altered because he sees the old facts in a new emotional perspective. As it spreads, the epidemic of optimism helps to breed conditions which both justify and intensify it. The mere fact that a growing number of business men are gaining confidence in the outlook becomes a valid reason why each member of the group and outsiders also should feel confident. For the hopeful mood means greater readiness to make new purchases, enter into new contracts, etc. — in fine, means that the incipient revival of -activity will be supported and extended. There is the stronger reason for relying upon the feeling in that its growth — like the growth in the volume of goods ordered — is cumulative. As new groups of business men become infected with optimism, their demeanor, talk, and actions confirm the faith of those who converted them. Thus the feeling of confidence becomes stronger as it spreads; that is, it becomes an increasingly powerful factor in supporting the movement out of which it grew, and in justifying itself. 456 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA 3. The Laggards in Business Revivals Just as there are often certain industries or localities which stand out as conspicuous leaders in a revival of activity, so there are often other industries or localities which stand out as conspicu.ous laggards. Bad weather, tariff changes, technical inventions, the discovery of new sources of supply, the devel- opment of new trade routes, alterations in popular taste, etc., may prevent particular enterprises from sharing the general improvement. Every industry or locality which languishes from any cause retards the growth of activity and of confidence among other industries or localities. But such cases seem more and more exceptional, and count for less and less as the revival progresses. For the cumulative character of the processes which we have been tracing results in making the general movement toward prosperity more dominant as it jjroceeds. Quite apart from the victims of special misfortunes, however, certain trades and localities have a late or a minor share in the benefits of a business revival. Such is the case on the whole with the agricultural and grazing sections in contrast with the centers of industry, commerce, and finance.* Even in those notable cases when the revival has begun with profitable crops for the farmers in certain sections, it has reached the other farming sections and the world of handicraft, small trade, and the professions, not by direct transmission, but indirectly by its effect upon the more highly organized world of business. Not until the lumber companies, mines, and quarries are working full time, the factories buying materials and employing men freely, the railways reporting few idle cars, and the mercantile houses busy — not until this stage has been reached is the impetus toward activity carried out from the centers to all corners of the land. And not until this time are all the classes which form the fringe of modern industry in cities and towns alike swept into the movement. 4. The Statistical Signs of Business Revivals A business revival is a composite made up of many elements. It is not to be defined in terms of any single change for the better, and not to be sharply marked off from the state of depression out of which it emerges. Indeed, the only safe way of dating a revival is to accept the concensus of opinion among men intimately familiar with business conditions at the time. Among all the "business barometers" there is not one which always rises or falls when these skilled observers agree that revivals occurred. This fact merits attention because of its bearing on the pTactical problem of forecasting changes in the business weather. i> Compare Chapter II, ii, 1. MITCHELL: BUSINESS CYCLES 457 An increase in the physical volume of business, indeed, seems to be an invariable concomitant of revivals; but this increase usually sets in months, even a year or more, before depression has relaxed/ A prophet who pinned his faith to this sign would therefore publish cheerful bulletins prematurely. The course of wholesale prices is an even less reliable guide. For, contrary to a widely accepted opinion, prices do not always rise in the early stages of revival, and they do sometimes turn upward during depression.' As for the money market, its changes during periods of business revival are irregular in part, and in part indistinguishable continuations of changes already under way before the revival began. For example, discovmt rates sometimes rise and sometimes fall when the change for the better occurs ; bank loans expand, but the expansion antedates the revival ; the ratio of reserves to deposits may move in either direction; the ratio of loans to deposits usually, but not invariably, rises ; applications for investment loans may increase before the revival or not until it has come; the purchases of bonds and stocks are similarly erratic in their behavior, etc.° The statistics of unemplojnnent, monetary circulation, savings, profits, and bankruptcies are no safer guides than those which have been mentioned. Thus there is no certain way of predicting when business will begin to recover from a prevailing depression. Only by compiling a composite record of numerous factors, and endeavoring to establish their general trend, can an intelligent guess be made. The whole business situation is so full of cross- currents and imcertainties at this stage of the cycle that forecasts are subject to a much wider margin of error than after the cumulation of prosperity has besnun. -&^ III. The Rise of Pbices 1. The Prices of Commodities A. WHY PRICES EISE While the level of wholesale prices often remains substantially unchanged or even recedes a trifle in the early stages of a business revival, it always advances in the later stages. This advance is not the simple matter of course it is often assumed to be. True, the growing activity of business means an increasing demand for com- 7 This statement is based upon a comparison between the leading indices of the volume of business pre- sented in Chapter V and the upward turning-points in business cycles pointed out in Chapter III. For further discussion of the increase in the volume of business during depression see Chapter XIII, ii, 3. s Though the recovery of business from the depression which followed the crisis of 1890 is dated from the year 1895 in England and France, the English and French index numbers presented in Table 11 indicate not only that prices failed to rise in 1895 but that they continued to decline in 1896, and advanced but a little in 1897. On the contrary, English index numbers show a slight rise in 1904, though the revival of business can scarcely be said to have begun before 1905. Therefore the failure of index numbers to rise does not justify the inference that no improvement has occurred in business, and the occurrence of a rise does not justify the inference that depression is past. 8 bee the tables in Part II relating to these various subjects and note the fluctuations in the years of revival and the years immediately preceding. 458 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA modities; but it also means an increasing supply. On this basis there is as much reason for expecting prices to fall as for expecting them to rise. The fact that business men presently become ready both to pay progressively higher prices for goods and to buy progressively larger quantities therefore constitutes a problem. This problem is the more difficult because several business conditions pre- vailing when a revival begins are distinctly unfavorable to a rise of prices. The effect of depression in reducing the costs of doing business has already been pointed out as among the factors which favor resumption of activity." But it does not favor an advance in the price level. On the contrary, it means that profits can be made without restoring prices to the level which prevailed before the depression set in. Second, at this stage of the business cycle, busi- ness enterprises are anxiously soliciting orders. The advantage in strategic position as bargainers is on the side of the buyers — much more so than later, when factories, railways, and shops already have all the business they can readily handle. Third, a prolonged period of depression often wracks to pieces certain combinations to maintain prices, and leaves the field over which free competition rules wider at its close than at its beginning. Fourth, every increase in the volume of business obtained in the early stages of revival makes a more than proportionate addition to profits, even though it be taken at unchanged prices. For until the existing equipment of standard efficiency for handling business is already busy, new orders can be filled without an increase in prime costs, and at a reduction of supplementary costs per unit of output. These conditions explain why prices often fail to rise promptly at the beginning of a trade revival, and why in other cases the initial rise is slow. But presently these conditions are turned into their opposites and become incentives for raising prices. The magic which works this transformation is the further expansion in the physical volume of business. Beginning sometimes two years or even more before the revival, this expansion is accompanied for months by falling and then by nearl}' stationary prices. But there is a critical point beyond which the expansion cannot go without producing an advance of prices, even in keenly competitive trades. This critical point is reached in the affairs of any enter- prise when it has already secured sufficient orders to keep busy its standard equipment and its regular staff of employes. To execute additional orders then requires overtime work, the hiring of new and presumably less efficient hands, the starting of old-fashioned machines, the installation of new equip- ment, or some similar change. Such measures involve higher prime costs, and often new supplementary charges as well. Hence additional orders no longer make a more than proportionate addition to profits, and may well make a less 10 See section I above, and for a more thorough analysis Chapter XIII, ii, 1 and 2. MITCHELL: BUSINESS CYCLES 459 than proportionate addition — unless higher prices are asked. Pear of checking the revival of trade may make enterprises slow in putting up their prices; but every delay encourages a further expansion in the volume of business and strengthens the conditions favoring an ultimate advance of the price level. At the same time, the expansion of trade facilitates the re-establishment of those combinations to maintain or advance prices which have broken down during the preceding period of depression and encourages the formation of new combinations. It also reduces the strategic advantage which buyers recently enjoyed over sellers in bargaining. As sellers become less eager to accept orders at the old level of prices, buyers generally become more eager to place orders. But this statement requires further analysis. B. HOW THE EISE OF PRICES EEACTS UPON THE DEMAND FOE COMMODITIES There is always danger that sellers may over-reach themselves by advancing prices more rapidly than the market conditions will support. For the expansion in the volume of business, upon which rests the whole movement toward pros- perity, may be checked by an ill-timed or excessive advance. Frequently one or more branches of trade receive a setback while others are reviving, because mistakes of this kind are made by leading enterprises. More rarely, the whole revival is retarded or even stopped by an over-rapid rise of the price level. There is evidence, for example, that this cause helped to blight the promising American revival of 1909.^^ But when the advance of prices is gradual and well balanced as between different goods it promotes rather than retards the growing demand for com- modities. For nothing stimulate^ the volume of present orders more power- fully than a moderate increase of quotations, which is thought to be the earnest of further increases in the near future. Provided they are not charged more for goods than their competitors, buyers count on being able to raise their own selling prices at least enough to defend their margins of profit. And they become eager to lay in large stocks or to make long contracts while quotations are still moderate and terms are still easy. Thus the anticipation of future 11 Certainly the advance of prices in this country was more rapid than in foreign countries where the revival was sustained. See the index numbers for identical lists of commodities in the IJnited States and other coun- tries, Table 12, and the confirmatory evidence borne by Table 11. A. D. Noyes, "Forty Years of American Finance," New York, 1909, pp. 245, 246, expresses the opinion that an over-rapid advance of prices contributed also to checking the revival of 1895. While the above mentioned tables do not show a marked difference between the course of prices in America, where the revival was short lived, and in Europe, where it developed into full-blown prosperity, the following detailed comparisons by months lends a rather equivocal support to Noyes 's opinion. ' Eelatwe Prices at Wholesale in the United States, England, and Germany, by Months, 1895-96 United States England Germany 1895— April July October 1896 — January Falkner Bradstreet Sauerbeck Sehmitz 84.7 5.97 61.7 83.47 85.2 6.42 62.8 84.30 86.3 6.52 63.3 84.70 85.2 6.31 61.4 83.82 460 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA advances in prices not only prevents present advances from reducing demand, but actually makes demand grow in the face of a rising level of prices. C. HOW THE EISB OP PEICES SPREADS AND CUMULATES Once set going, the rise of prices rapidly spreads over the whole system of prices in much the same manner that the activity of trade out of which it grew spreads over the whole field of business. When the price of a commodity has been advanced at any stage of its journey from original producer to ultimate consumer, that advance represents an increase of cost to every subsequent pur- chaser, and becomes a reason for increasing its price at later stages. At the same time, those who, first put up the price have a stronger business incentive for securing larger supplies to sell at their wider margins of profit. Their eager bidding offers the persons from whom they buy an opportunity to exact higher prices. Thus the advance travels backward to antecedent prices, as well as forward to subsequent prices. In less measure, the impulse toward higher prices is imparted to complementary and to competing goods. From the latter it extends to their materials, products, complements, and competitors, and so on from one class of commodities to the next. The great raw staples of com- merce, which are sure to be touched comparatively early in this process, play an especially prominent role in spreading the rise ; because an advance in their prices, caused by an increasing demand from any quarter, is promptly felt in all the hundreds of uses to which they are put and becomes a reason for advanc- ing the prices of all their manifold products. The rise of prices reseml^les the increasing activity of trade also in that it is cumulative. If the advance is begun, for example, in the textile trades and spreads thence to other lines, it will flow back again in the form of higher prices for all the things which textile mills buy. Then these mills must raise their selling prices once more or sulimit to a reduced margin of profit. And if the textile mills, as is likely, do raise their selling prices further, that step starts tho whole process over again on a higher level. Since the successive sets of business men who handle a given commodity are generally successful in their endeavor to pass on the increase of prices from one to another, the onus of the advance finally falls upon the ultimate consumers. For present purposes, these people belong to one of two classes — individuals who buy consumers' goods for personal use, or investors who buy equipment for business use. Both classes pay the increased prices, not only without diminish- ing, but while actually augmenting the volume pf their purchases. For the growing activity of business, which leads to the rise of prices, also provides the mass of families with larger money incomes to spend, and makes investors, whether acting singly or through business enterprises, eager to get the equip- ment necessary for participating in the high profits which prosperity promises. MITCHELL: BUSINESS CYCLES 461 D. WHY DIFFEEENT GROUPS OF COMMODITY PRICES EISE IN DISSIMILAR DEGREES Of course the advance of prices is far from uniform. A few prices fall, a few remain constant, and of the many which rise some advance one or two, some one hundred or more per cent. Our concern, however, is not with the idiosyncrasies in the price-movements of single commodities, but with theii' average variations. That there is a distinct trend in the fluctuations even of those relative prices which lie far above or beloAV the median is showm by the table of decils.'" That this trend has been measured with substantial accuracy is shown by the close agreement among index numbers compiled by distinct authorities from quotations obtained from different sources and including dis- similar lists of commodities." But it has also been shown that this trend is not the same in all parts of the system of prices. While all parts of the system feel the influence of a business revival, they respond to the stimulus with varying degrees of promptness and energj^. The genuineness of these differences as phenomena characterizing a shifting of the price level is attested not only by the regularity w4th which they recur whenever business improves; but also by the fact that the divergencies among the average fluctuations of the groups referred to are much wider than the divergencies among general index numbers made hj different hands." Of such dissimilarities in the average price variations of groups of com- modities, the following have been established: (1) retail prices rise less promptly and less considerably than the wholesale prices of the same com- modities ; (2) the wholesale prices of finished products lag behind the wholesale prices of the same commodities in a partially manufactured state, and the latter prices in turn lag behind the prices of the corresponding raw materials ; (3) the wholesale prices of manufactured consumers' goods rise perhaps more promptly, but certainly less considerably than the wdiolesale prices of manufactured pro- ducers' goods; and (4) the wholesale prices of raw mineral products respond to changes in business conditions wdth greater certainty and greater accuracy than do the wholesale prices of raw farm, animal, or forest products.^^ The differences between the average variations in the retail and wholesale prices of the same goods are due chiefly to the steadiness of certain important items of expense in conducting a retail shop. A shop-keeper's rent, wages, losses on bad debts, interest on fixed investment, depreciation charges, and the like do not rise promptly with the wholesale prices of his wares. Consequently he can maintain or even increase his profits on the business as a whole while raising his selling prices less than his buying prices have been raised. There- fore the more rigorously competition constrains shop-keepers to defend their 12 See Chapter IV, i, 7. 13 See Chapter IV, i, 8. 1* See Tables 9 and 10, and the discussion appended to each — Chapter IV, i, 8. 15 See Chapter IV, i, 3, 4, 5, and 6. 462 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA reputations for reasonable prices and fair dealing, the more certainly will retail prices lag behind wholesale prices on the rise/" Similar is the explanation of the differences between the average variations in the wholesale prices of the same goods at successive stages of their progress from the state of raw materials to that of finished products. Manufacturing expenses like retailing expenses include important items which do not rise rapidly on the return of prosperity. Hence the more accurately selling prices are adjusted to total expenses of production, the more certainly will finished ^■' products lag behind partly-finished products and the latter behind raw materials when the price level is advancing. Even the manufacturing enterprise with a complete monopoly finds its inter- est in keeping selling prices more stable than the prices of raw materials. For if the monopoly charged the maximum-net-revenue price before the price level advanced it runs danger of losing profits by putting up its selling prices faster than is necessary to meet the increase of expenses, and total expenses increase much less rapidly than the prices, of raw materials. In fact, the large and ably managed combinations which control a considerable proportion of their indus- tries have generally kept their selling prices more stable than prices had formerly been under competitive conditions." The dissimilarities between the average price variations of consumers' and producers ' goods in their finished state have a different source. In both classes, the goods for which we have data are mainly important staples. ISTow the consumers' demand for articles which enter into the budget of the great mass of families is fairly constant. Families economize or expand their expend- 18 Of course rent, wages, and interest charges are themselves aggregates of prices paid for certain business adjuncts. What happens, then, is that certain prices which enter into the cost of retailing rise less rapidly than the wholesale prices of wares. Hence the lagging of retail behind wholesale prices may be described as an adjustment of retail prices to the aggregate of the prices which the shopkeeper must pay. 17 Since this chapter was written, Professor B. S. Meade has published an index number of the prices of 18 commodities produced by trusts and of 18 commodities produced under competitive conditions. His data were obtained from the Bureau of Labor and his relative prices were computed on the basis of actual prices in January, 1897. The articles selected and the results obtained are as follows: Non-Trust Trust Manila rope Anthracite coal Bituminous coal (Toughiogheny) American cement New Orleans molasses Eefined petroleum Pig-iron (Bessemer, Pittsburgh) Cotton-seed oil Bleached sheetings Glucose Corn meal Newspaper Yellow pine Proof spirits Plain white oak Leather Print cloth Wire nails Glass tumblers Steel rails Vici kid shoes Eaw linseed oil Sheet zinc Pig lead Flour (New York) American fine salt Cotton Plug tobacco Bare copper wire Sulphuric acid Wilton carpet Granulated sugar Earthenware plates Cotton thread Bleached shirtings Domestic parlor matches MITCHELL: BUSLNBSS CYCLES 463 itures cliiefly by cutting off or adding luxuries, amusements, savings, and the like. Moreover, population grows at a steady rate which is little affected by 1897 A 1898 1899 Non-Trust Trust Non-Trust Trust Non-Trust Trust January- 100.0 100.0 98.7 104.9 102.7 105.9 February 99.8 98.3 98.7 104.9 104.5 108.1 March 99.8 100.2 94.6 105.4 108.3 110.5 April 99.4 99.9 100.2 104.1 110.8 113.7 May 99.2 99.9 102.2 106.5 112.2 113.9 June 98.2 100.8 104.4 107.1 114.4 114.6 July 98.2 100.9 104.3 107.1 113.6 116.1 August 99.3 105.7 103.8 107.2 115.5 116.8 September 100.9 108.3 103.5 104.5 119.9 119.0 October 99.9 107.2 101.9 103.2 121.3 122.0 November 98.5 ■ 104.0 102.6 104.8 121.4 124.0 December 98.7 104.0 102.2 104.1 127.3 127.2 1900 1901 1903 A A January 131.6 130.1 119.2 126.5 123.7 126.2 February 132.1 133.3 119.1 128.7 124.3 129.1 March 134.0 133.4 118.7 128.6 125.2 130.2 April 134.1 133.6 119.5 128.8 125.2 129.8 May 131.9 130.5 117.3 127.5 128.0 128.8 June 128.3 131.3 117.5 126.9 128.0 128.3 July 136.9 131.0 117.0 131.3 128.0 130.4 August 123.5 128.8 118.2 131.1 127.3 129.6 September 121.2 128.9 120.1 126.8 127.3 127.7 October 121.2 128.8 121.3 128.3 128.6 125.2 November 119.7 131.0 123.3 127.4 129.5 123.1 December 119.1 1903 A 128.0 124.4 1904 125.9 128.3 1905 A 125.4 January 127.8 124.4 127.1 122.3 125.1 122.9 February 127.8 124.5 130.5 124.5 124.0 120.4 March 127.9 127.2 130.7 124.7 124.4 121.7 April 128.8 127.8 131.5 125.2 124.5 120.9 May 128.9 126.4 128.2 123.3 124.5 121.8 June 131.3 126.3 130.4 122.0 125.5 122.8 July 131.3 125.8 124.2 122.8 128.3 121.0 August 132.4 125.2 122.9 121.4 130.5 121.8 September 131.5 124.6 119.0 121.5 130.7 123.8 October 128.2 125.4 123.9 121.6 130.5 121.5 November 127.4 122.5 126.8 114.8 133.7 122.2 December 126.5 123.7 129.3 123.3 13.5.5 123.0 1906 1907 1908 A A A January 135.9 124.5 142.1 130.2 142.7 130.1 February 135.2 126.3 143.8 130.2 142.2 130.0 March 133.7 122.7 147.2 131.7 138.5 131.8 April 136.5 126.1 147.5 131.4 136.0 130.1 May 136.7 124.4 147.7 131.8 135.9 129.8 June 136.8 124.2 153.8 135.3 132.0 131.2 July 136.8 123.9 154.5 132.9 131.8 129.8 August 136.6 125.7 152.3 133.1 131.5 131.0 September 136.6 125.3 146.5 133.3 130.1 131.4 October 137.6 126.3 148.3 133.1 131.7 132.0 November 141.1 126.8 146.9 130.4 132.1 130.3 December 142.8 130.0 1909 A 142.1 130.1 1910 133.3 131.5 Non-Trust Trust Non-Trust Trust January 133.3 129.2 144.4 136.7 February 133.2 130.8 143.9 135.2 March 133.1 130.8 143.8 137.2 April 133.0 128.0 142.9 135.6 464 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA business cycles." On the contrary, the producers' demand for business supplies other than raw materials — particularly the demand for commodities which con- stitute part of the equipment for production — becomes much more brisk as the prospects of profits become brighter. At the same time the establishing of new business enterprises and the enlarging of old enterprises become more common. This superior stability of consumers' as compared with producers' demand is confined, however, to demand for staples. Had we price data for consumers' luxuries we should probably find them exhibiting average variations equal to or greater than those of staple producers' goods. Finally, the difference in the accuracy with which the prices of raw minerals and of other raw products reflect changes in business conditions arises chiefly from technical circumstances affecting the volume of current supply. The pro- duction of coal, iron, copper, zinc, etc., is more completely under man's control than is the production of beef, pork, mutton, and wool, or of wheat, cotton, sugar, and corn. The influence of increasing demand upon the prices of the latter groups of products is often offset by favorable seasons for the farmers, or exaggerated by bad seasons, while the prices of mineral products respond regu- larly to changes of market conditions. Forest products belong with minerals rather than with animal and farm products, so far as concerns their conditions of production in very brief periods. But, in the United States at least, the exhaustion of the better sources of supply — better both in quality of timber and iu location — has recently proceeded faster in the lumbering than in the mining business. Hence the prices of forest products have been moving upward rather steadily, and the influence of business conditions has been limited to retarding this advance in times of depression and accelerating it in times of prosperity." 2. The Prices of Labor Into the sweep of the changes which follow hard upon one another when business revives from depression there is presently draAvn even the least business- like section of the community — the wage-workers whom we habitually think of 1909 1910 Non-Trust Trust Non-Trust Trust May 134.0 128.2 139.2 133.8 June 135.4 128.5 138.6 134.0 July 137.3 129.0 138.6 132.4 August 138.9 128.5 138.6 138.4 September 138.9 130.4 137.4 141.4 October 138.9 130.8 137.4 133.7 November 142.2 135.4 135.1 133.3 December 142.4 133.7 135.2 138.3 From these figures Meade concludes (1) that in the years 1897-1900, while the trusts were in process of formation, the two series of relative prices ran nearly parallel; (2) that since 1900 the trust-made products have had lower relative prices than those made under conditions of competition; and (3) that the trust-made products have been decidedly more stable in pi'ice than the others, so far as concerns large fluctuations. — "The Economies of Combination, ' ' Journal of FoUtical Economy, April, 1912. Professor Meade has kindly provided me with a revised version of his table, in which an error or two lias been corrected. 18 See Chapter V, i. i» Compare Chapter IV, i, 6, MITCHELL: BUSINESS CYCLES 465 not as making money but as making a living. For reasons of peculiar interest the changes which take place in their rates of pay do not run parallel with the changes in the prices fixed for commodities by dealings between business enter- prises. The results which flow from this inaccurate adjustment in their turn become new factors of great weight not only in determining the material well- being of large numbers of men — a matter with which business as such is not concerned — but also in determining the market for consumers' goods and the margins of profit between the selling prices of all sorts of commodities and the labor costs of providing them. Both the American and the British statistics presented in Chapter IV confirm the prevailing opinion that in times of business revival the prices of labor rise less than the prices of commodities at wholesale. The American figures are confined to wages in manufacturing industries, but the British figures indicate that wages in agriculture are even more sluggish in their movements. Less well known is the fact that the advance often begins sooner in the labor than in the commodity markets. Yet both in the United States and in Great Britain wages began to rise after the depression of the middle nineties before wholesale prices had touched their lowest point. The evidence for the second decade is less conclusive. The crisis of 190.3"04 v/as not sufficientlj^ severe in America to cause a reduction of wages, and the Bureau of Labor has not yet published data for the years after the panic of 1907. In England the crisis of 1900 was followed by wage-reductions, and in the later revival wholesale prices advanced not only farther but also earlier than the prices of labor. The reason why wages rise less than wholesale prices is found principally in the unlike organization of the labor and commodity markets. Where trade unions are non-existent or weak the individual laborers have neither the prompt knowledge of changes in business conditions necessary to determine what employers can afEord to pay for labor, nor the power to enforce such demands as are not readily conceded. As an organization for collective bargaining, the trade union improves the wage-earners' position in these respects. But many unions seek to make wage-contracts running for a considerable time and binding the men not to ask for fresh advances until the contracts have expired. Most important of all, the individual working-man, the trade union, and the employer are much more under the dominion of the idea of a just price than are the business men dealing in commodities. This survival from the relatively stable economic life of the middle ages has almost ceased to influence the prices men offer or accept for cotton, wheat, or iron; — such commodities are "worth what they wall bring." But there still persists in the minds of all the parties in the labor market certain notions of what is a proper wage for a day's labor. When the employer offers much less than the customary price, he arouses stubborn resistance which is reinforced by the whole community's commonsense that the work is worth more, or that a man cannot support his family decently on such 466 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA a sum. On the other hand, when working-men ask much more than the cus- tomary prices, their pretensions strike others as absurd. Of course, such feelings impede the free working of supply and demand in the labor market — or rather constitute an important feature of both supply-price and demand-price — and tend to keep wages more stable than are prices in markets where pecuniary motives have unrestricted sway. If these conditions obstruct the rapid rise of wages when business revives, they also facilitate the restoration of wages to the customary levels when a depression accompanied by wage-reductions is passing away. Such is the explanation of the celerity with which wages rose after the hard times in the nineties. Early in the movement toward increase of activity, in the United States before a revival could fairly be spoken of, employers conceded a slight increase of pay. That English employers did not follow the same course in the revival of 1904-06 may be due to the fact that the unprecedentedly high rates which the men had secured before the crisis of 1900 had not been paid long enough to become fairly entrenched in the minds of masters and men as the fit and proper prices to be charged. Hence they yielded with unaccustomed ease to the pressure of hard times after the crisis and were restored in the subsequent period of prosperity with unaccustomed difficulty. It must also be said that the economic pressure which drives the great mass of wage-earners to sustain their arduous struggles for higher wages relaxes just at the time when rapid increases might be wrung from employers. The relatively moderate rate at which retail prices rise in the earlier stages of revival prevents the cost of living from going up fast. On the other hand, the economic position of working-men is being improved by the greater regularity of employment and the abolition of "short time." Even ^^ithout any increase in their rates of pay the wage-earning class is better off. They hesitate to demand an increase of their customary wages until the feeling of this relative prosperity is dulled by familiarity, until the cost of living has advanced seriously, and until personal savings or trade-union accumulations have put them in position to fight with vigor. 3. The Prices of Loans Wage-earners may not be thorough business-men; but bankers most emphatically are. Nevertheless, discount rates usually average less in the first year of business revival than in the last year of business depression.'" Invari- ably, however, these rates rhove upward before the revival has been long in 20 Table 28 shows, for example, that in London and Paris both the market and the bank rates were lower in 1895 than in 1894, and that in these markets and in Berlin also the rates were lower in 1905 than in 1904. The more detailed data for New York, when averaged by phases of the business cycle, give similar results (Table 26). Almost every time that business conditions have improved the discount rates have dropped. If the examination is pushed back into the monthly figures of Table 22, the situation is found to be complicated by the regularly recurring seasonal fluctviations in rates. But, when this factor has been allowed for, the con- clusion remains that in their earlier stages business revivals are characterized by low and often by declining rates of discount. MITCHELL: BUSINESS CYCLES 467 progress. Sometimes, as in the European money markets in the middle nineties, the advance precedes the rise of wholesale prices ; sometimes it follows the latter, as in the same markets ten years later; sometimes the two movements are nearly simultaneous, as in New York in 1898 and again in 1905. The cause of this advance in discount rates is not far to seek ; what requires explanation is the slowness with which the rise starts. As has been said more than once, bank loans, like transportation, are among the goods required by nearly every business enterprise. The volume of loans demanded, however, increases, not with the physical, but with the pecuniary volume of business, and the latter type of expansion may be deferred by a continued fall of commodity prices for some time after conditions have bettered. Moreover, the banks have such liberal reserves at this stage of the business cycle that they are able to meet an increasing demand for some time Avithout weakening their position unduly." Still further, it was shown in Chapter VII that, during recovery from a period of depression which has been both long and severe, the ratio of capital liabilities to total liabilities among the banks is reduced by funds coming from depositors.^^ This inflow of money increases the lending power of the banks without increasing the investment upon which profits are reckoned, and therefore retards the advance of discount rates. But, when banks have secured tolerably full employment for their resoiirces available for lending, they exact higher prices for additional advances, in the same way that manufacturers raise their selling prices when they have obtained substantial "backbone" orders. Call-loan rates usually advance more promptly than discount rates.^^ The reason is partly that the demand, which comes almost wholly from the stock exchange, expands as soon as speculative interest revives, and partly that the supply of funds for lending on call contracts as soon as favorable opportunities open for employing money in other ways. For ''the call-loan market is really the storage place for the nation's surplus credit, and consequently has to take up all the stress resulting from changes of stress in other parts of the credit system. ' '" On the contrary, interest upon long loans as represented by the net yields of investments in railway and government bonds at current prices, lags decid- edly behind discount rates upon the rise.'' One cause of the lagging is the increase of confidence among investors, with its consequent reduction in the premium charged for the assumption of risks. Another cause may be an increase in the current rate of savings, with its consequent growth in the sums coming 21 Compare the ratios of cash on hand to demand liabilities in Tables 82, 83, 89, 97, 100, and 104. 22 Compare Table 90, and the context. 23 See the tables of Chapter IV, iii. 24 T. F. Woodlock, ' ' The Stock Exchange and the Money Market, ' ' in The Currency Problem and the Present Financial Situation, a Series of Lectures delivered at Columbia University, 1907-08, New York, 1908, p. 37. Com- pare Chapter VII, i, above. 25 See Chapter IV, iii. 468 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA forward for investment. But our knowledge of savings is too indefinite to permit of confident statements.'" A third cause will be revealed presently when we examine into the demand for long loans on the part of business enterprises." IV. The Increase of Profits 1. Why Profits Increase Since the quest of profits is the great driving force of the money economy, the significance of all the processes which have been sketched culminates in their bearing upon the amount of money business enterprises can make. The net resultant of these processes is to increase profits. Of chief import- ance is the fact that supplementary costs rise slowly in comparison with the physical volume of business. So long as this marked difference in the rate of increase is maintained, prime costs may keep up with or even outstrip the advance of selling prices, and still net profits will grow larger with each suc- cessive increment added to the turnover. But in many instances prime costs also lag behind selling prices on the rise. Discount rates often and prices of raw materials regularly rise faster than do the prices of finished products. But rates of wages lag behind. While the number of well-trained hands remains equal to requirements, while dawdling can be prevented, and while ' ' overtime ' ' can be avoided, the cost of labor to the employer increases no faster than the rates of money wages. Freight charges constitute another important item in prime costs which probably lags behind wholesale prices on the rise. It follows that the rise in the profits made by different business enterprises must vary widely. Obviously, those enterjjrises are favored which secure an early share in the increasing volume of business, and in the subsequent rise in selling prices. In contrast, enterprises which are late in being reached by the growing demand for goods, and early in being reached b}^ the rise in the prices of raw materials, etc., maj find the revival of prosperity a doubtfxil blessing for some time. Again, it is an advantage at such seasons to have relatively heavy supplementary and relative!}- liglit prime costs. Similarly, it is an advantage to have prime costs consisting largely of wages and freight charges. Now, since these several factors — promptness in being reached by the increase in the volume of business and by the rise in prices, the proportion of supplementary to prime costs, and the share of prime costs which is cost of labor and transportation — since these factors are found in all their possible combinations, the diversity in the fluctuations of profits is amply accounted for. 20 See Chapter VIII, i. -^ See.section v of this chapter. MITCHELL: BUSINESS CYCLES .469 Meager as are the statistics concerning profits, they suffice to confirm the above conclusions. That, within large groups of enterprises or industries, the rate rises promptly with the tide of prosperity there is no doubt. Indeed it is certain in particular cases and probable on the average that profits begin to pick up before the period of depression is over. Wagon's statistics of the ratio borne by net profits to the share capital of joint-stock companies in 37 German industries even indicate that in a few cases the years of deepest depression were the most lucrative of the whole business cycle from 1891-1900. But these cases are decided exceptions, and the years which brought maximum profits to the largest number of industries were the two years following the revival of activity. in 1895, the year when prosperity culminated (1899), and the year of the crisis (1900). Dermietzel's figures, which show the general drift of affairs more clearly than Wagon's, indicate that profits were lowest in the third year of the depression, that they rose a trifle in the last year, and then continued their rise without interruption through the revival of activity and the period of prosperity to a climax in 1899.'' 2. The Rise in the Prices of Stocks Since the market price of a business enterprise rests primarily upon the capitalized value of its current and prospective profits, the prices of stocks vary roughly with the rate of profits. The degree of this correspondence can be determined for the one group of enterprises for which we possess data relating both to profits and stock prices — the American railways. On the whole, the prices of stocks do follow changes in net income, but follow at some distance, sometimes rising less than profits in periods of revival, for example in 1898, — sometimes rising more, for example in 1905 and 1909.'''' The explanation of the discrepancies which mar the parallelism is to be found in the facts that rail- way dividends have been kept more stable than net income, that the stock market looks forward to future profits in coming years as well as back to net earnings for recent months, that the interest rate at which anticipated future profits are capitalized is itself subject to variations, and that considerations other than those of an investor intent upon income and safety — such as specula- tion, manipulation, and contests for control — are frequently potent factors in the market.'" But even when stock prices lag furthest behind the gains in net income, they both precede and exceed the rise of prices at wholesale." Two factors contribute toward this result. First, it has just been shown that profits recover some of 28 See Chapter IX, i. 29 See Chart 25, Chapter IV, iv. 30 Compare Chapter IV, iv, 6. 31 The following figures compare the index number for 40 common stocks with the various index numbers of prices at wholesale which are available by months for each of the periods of revival in America since 1890. 470 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA their earlier losses before the revival sets in, and in an earlier section it was shown that commodity prices often do not rise until the movement toward recuperation has continued for several months or even a year/^ Second, the stock market does not wait for an increase of profits to take place, but discounts it as soon as its occurrence is anticipated. The advance in prices is even less uniform among stocks than among com- modities.^^ In part these differences arise from dissimilar changes undergone by the profits and financial prospects of the various companies. But there are other differences which regularly recur between the prices of different types of stocks. Low-priced stocks rise more rapidly than the high-priced, common stacks rise more rapidly than preferred, and stocks which pay dividends irregu- larly rise piore rapidly than those which are firmly established upon an income- yielding basis. The chief reasons for these differences are the greater attractive- ness of low-priced stocks ]to speciilators, the greater relative weight of the invest- ment demand in the ease of dividend-paying stocks, and the superiority of pre- ferred to common stocks in steadiness' of yield.^* 1891-92 1895-96 Falkner's Falkner's index Railway index Railway number stocks number stocks July 97.7 102.5 January S4.7 74.0 October 97.9 125.0 April 84.7 80.0 January 96.5 128.0 July 85.2 93.0 October 86.3 93.0 January 85.2 77.0 1897 1900-01 Falkner's Bureau of index Railway Labor index Railway number stocks number .stocks January 82.0 79.5 January 111.4 128.0 April 80.9 72.0 April 112.9 140.0 July 79.9 83.0 July 109.3 128.0 October 83.6 95.5 October 108.7 131.5 January 108.3 169.0 1904-05 1908-09 Bureau of Bureau of Labor index Railway Labor index Railway number stocks number stocks January 113.2 184.0 January 125.7 174.5 April 114.0 172.5 April 124.0 181.0 July 112.0 177.5 July 121.7 206.0 October 111.8 217.5 October 122.1 217.0 January 114.0 236.5 January 124.0 259.0 It would be a mistake to conclude from these figures that whenever stock prices rise commodity prices will presently follow. Examination of Table 44 shows several instances in which the stock market turned upward and then relapsed again while commodity prices were falling. 32 See sections ii, 4, and iii, 1, A, of the present chapter. 33 The decils for the relative prices of 40 common stocks cover a wider range than the decils for 145 com- modities. See Tables 33 and 8. 34 See Tables 34, 37, and 42, together with the accompanying text. MITCHELL: BUSINESS CYCLES 471 V. The Volume of Investments All the processes of a business revival heretofore described might run their course vyithin the circle of business enterprises existing at the close of depres- sions. But it is characteristic of the money economy that the prospect of good profits leads not only to greater activity among the old enterprises, but also to extensions of their size and to the creation of new^ enterprises. This expansion of business undertakings is the more important because for a time at least it imparts new energy to the very causes which produced it. While the investment of fresh capital in business enterprises never ceases altogether, it sinks during depression to a relatively lower ebb than does the rate of current production of such staples as agricultural produce, coal, or even iron. Recovery usually begins before depression has passed away; but it is not until business has distinctly entered upon the phase of revival that new investments of this character become large again. Sometimes the first year of recuperation brings the maximum investments of the cycle, more often the second or third year. This maximum is likely to be several times as great as the preceding minimum. The grovd;h of industrial equipment is therefore most uneven. These statements, based upon the tables given in Chapter VIII concerning the applications for business loans, the capital of new joint-stock companies, the increase of railway mileage, the cost of buildings erected, the amount of income re-invested in their own. business by banks and railways, etc., — ^these statements accord well with the preceding analysis. Not until work has been provided for the existing industrial equipment by the slow expansion in the volume of business during periods of depression, supplemented by its more rapid strides after revival begins, and not until the profits of existing business enterprises have been raised to a satisfactory level, are there many tempting opportunities for fresh investments. But as these conditions occur often at an early stage of the period of business expansion, so with corresponding fre- quency the first year or two of revival brings a large aggregate of corporate borrowings on long time.''^ While our information with respect to the volume of savings from year to year is scanty, we have no reason to suppose that its growth is so uneven as that of investments. Hence it should follow that after a year or two of heavy business borrovnngs the current supply of investment funds available for the purchase of corporate securities will show signs of being unequal to the demand. At least one such sign has already been found — the rise of interest rates upon long-time loans, which usually begins somewhat later than the rise of discount 35 An anomaly in the tables of applications for loans which may trouble readers at this point is explained in Chapter XIII, i, 1, C. 472 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA rates or even of commodity prices. ^Vhile the return of confidence among inves- tors helps materially to keep this rate from rising promptly with the demand for such loans, it presently has a contrary effect. Let confidence reach the point at which investors become ready to assume considerable risks and the demand for bonds at a fixed rate of interest will begin to shift into a demand for stocks promising a higher, but less certain, rate of dividend. Then corporations seek- ing to "place" bonds will be obliged to offer greater inducements by raising the nominal rate of interest or selling securities bearing the old rate at a lower price. Combined with the difference of pace at which the demand for long loans and the supply of current savings expand, this movement accounts for the rise in long-time interest rates which usually occurs when prosperity has fairly begun.'" So soon as the volmne of investments has attained large proportions, another stimulus is imparted to the activity of business. For the establishment of new and the enlargement of old enterprises involves a heavy demand for new indus- trial equipment — buildings, machinery, furnishings, etc. Then the industries concerned with the supply of the many kinds of goods included in these broad categories come in for their share of prosperity, and add their quota to the increasing demand for materials, equipment, labor, discounts, and long loans. The whole set of processes characteristic of business expansion is thereby ren- dered still more intense. VI. The Business Equilibeiltm The preceding sections show how the endlessly complicated processes started by an increase in the physical volume of trade convert depression into prosperity. The salient feature of the whole development is that each successive effect reacts to strengthen the causes which produced it, so that the movement toward pros- perity gathers momentum as it proceeds. Every industry wakened to activity stimulates other industries, and when the latter are roused their activity creates a larger demand for the products of the industries from which the stimulus came. The swelling volume of trade presently sends up the prices of certain commodities; every such advance becomes a reason for raising other prices ; the latter advances presently cause the first prices to be raised anew, thus starting the whole process over again on a higher level ; and the rising of the price level promotes the expansion in the volume of business out of which it grew. In combination, the expansion of trade and the rise of prices make those who profit b}^ them optimists; every convert to optimism makes new converts; the latter confirm the faith of the first ; and the resulting prevalence of business confidence favors further expan- '■" See section iii, 3, above. MITCHELL: BUSINESS CYCLES 473 sions in the volume of trade and further advances of prices. These developments make workingmen insistent to demand, and employers able to concede higher wages; the resulting increase of family incomes widens the market for the increasing output of consumers ' goods and sustains the advances made in their prices; meanwhile the higher cost of labor occasions further advances in the prices of commodities at wholesale and retail. Interest rates and rents rise for similar reasons, and their advances have similar effects upon the demand for consumers' commodities, the costs of production, and the level of prices. Finally, every increase of profits resulting from the expanding volume of business and the rising level of prices encourages new investments in business enterprises; these new investments swell the volume of business still more, drive prices still higher, favor new advances of wages, interest, and rents, and augment afresh the profits of numerous trades. The more vividly this cmnulative growth of prosperity is appreciated, the more difficult becomes the problem why prosperity does not continue indefinitely ; instead of being but one passing phase of the business cycle. Of course prosperity confers no immunity against disasters which interfere with the course of business ; but over many such rocks the accimiulated momen- tum of good times may run without serious mishap.. The great shortage of the American corn crop in 1901 did not stop the "boom" then in progress, though it came soon after a spectacular corner in the stock market ; the failure of Mr. Walsh's banks in Chicago, the San Francisco fire, and the great coal strike did not stop the "boom" of 1905-06, though they followed hard one on the other. For such misfortunes affecting a few sections of the business com- munity the superabounding prosperity of the other sections is more than a match. On the other hand, many periods of intense prosperity have ended in years of peace, plenty, and good fortune. The waning, like the waxing of pros- perity, therefore, must be due, not to the influence of "disturbing causes" from outside, but to processes which run regularly within the world of business itself. The world of business is a system comprising numberless independent enter- prises, bound together by industrial, commercial and financial ties. For the continuance of prosperity it is indispensable that a certain balance be main- tained between the fundamental processes which constitute the activity of this system. The demand for goods of every kind must keep pace with the increas- ing supply, despite the steadily rising prices; the cost of raw materials must not increase too much in comparison with the selling prices of manufactured goods ; mercantile collections must grow with mercantile credits ; bank reserves must expand with demand liabilities ; the cost of living must not rise much faster than money incomes; banks and investors must continue able to provide the ever-increasing loan funds required by business enterprises; and the like. If there occurs a serious maladjustment in the rate at which any of these factors 474 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA are growing in relations to the others, some business enterprises mil suffer loss of profits. Then the bonds which unite different enterprises will become chan- nels through which the injury will spread to other enterprises, just as they were recently channels for the spread of prosperity. Unless the original injury is promptly healed, there is grave danger that the cumulation of prosperity will be converted into a cumulation of depression. It is some such maladjustment among the various factors in the system of business which brings all seasons of expansion to a close and turns prosperity into crisis. The regularity with which this happens suggests that prosperity itself has other effects than those which tend to sustain and intensify business activity. During the earlier stages of a business revival these effects pass unnoticed ; but, though slow in developing, their later growth must be cumulative at a higher rate than the growth of the prosperity-producing factors. The next task is to investigate the sources and character of these stresses which accum- ulate within the system of business until they finally disrupt its equilibrium. CHAPTER XI HOW PROSPERITY BREEDS A CRISIS I. The Increasing Costs of Doing Business Among the threatening stresses which gradually accumulate within the system of business during seasons of high prosperity is the slow but sure increase in the costs of doing business. 1. Supplementary Costs During the early stages of a business revival, that portion of the total cost of carrying on an enterprise which consists of supplementary charges declines, because the sum of these charges remains nearly constant while the number of sales over which they are distributed increases.^ This decline of supple- mentary costs per unit gradually ceases as the revival grows into full prosperity. For when the current volume of business grows large enough to tax the full capacity of existing mines and factories, railways and stores, it becomes neces- sary to enlarge the old or to found new enterprises to care for additional orders. Of course such additions to the existing industrial equipment involve the enter- prises which undertake them in new supplementary charges — interest on the funds invested, rents for the use of new premises, depreciation on buildings, machinery, etc., insurance, salaries for general officials, and the like. Often these charges are less per unit of product which the new equipment turns out than in the case of the old equipment, because improved processes or machinery are available for adoption. But, on the other hand, the initial cost of construction in the midst of a period of prosperity is high — a fact which saddles the new plants from the start with heavy interest charges. Further, when a new plant is founded by a new company, the latter must usually invest considerable sums in building up a trade connection. In this process it is fre- quently compelled for a time to take customers who have made trouble for them- selves in dealing with the old established firms and whose business is likely to prove equally unsatisfactory to the new. These high interest charges, costs of getting established, and losses upon bad debts often overbalance the advantages from improved technical equipment. 1 See Chapter X, iv, 1. [475] 476 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Another factor of some moment is the gradual increase in the supplementary costs of the old enterprises themselves — an increase quite apart from that involved in extending plants. When leases expire or bonds fall due in a period of pi'osperity, the enterprises concerned must expect ordinarily to pay higher rents and higher interest to secure renewals. Permanent officers, also, are more likel}' to claim and to secure an increase in the scale of their salaries when business is good and the cost of living is advancing. Often more important than this cessation of the decline in supplementary costs per unit, is the positive increase Avhich prosperity brings in prime costs. 2. The Prime Costs of Weak Enterprises When a revival of activity begins, the business enterprises which have been running with few intermissions during the period of depression are surrounded by a fringe of other enterprises which have closed down altogether. Disadvan- tageous location, antiquated equipment, poor trade connections, weak financial backing, timid or unskillful management — any of these circumstances may have been responsible for their inability to keep prime costs down to the low selling prices which depression brings. Rather than to make goods which do not repay even the cost of labor and materials, they have shut their doors and pocketed the entire loss of supplementary charges. When prosperity returns and prices rise, tliese enterprises begin to start up again, one after one. They waste more material, or more labor, or more capital, or more transportation in putting a given output upon the market than do their more fortunate rivals, and at given prices their profits are narrower. But their resumption of business has this effect upon all the well-equipped, well-located, and well-managed enterprises in the field; it bids up the prices of materials, labor, etc., and its addition to the supply of goods sent to market increases the difficulty of advancing selling prices sufficiently to offset the encroachments of costs upon profits. Many of the strongest enterprises have among their machines or plants some which fall below the current standard of efficiency. Like the weak enter- prises, these sections of the industrial equipment are allowed to stand idle when business is dull, but started again when business becomes brisk. Of course, the average of the prime costs per unit of the goods produced by such an enterprise rises Avith every old machine and every ill-located plant it sets at work. 3. The Cost of Labor The average rise in the rate of wages is slow in the first year or two of a trade revival, but it becomes more rapid in the later stages when employers have difficulty in finding sufficient hands to fill their orders. Encroachments w^ould seldom be made upon profits, however, did fluctuations in the rate of MITCHELL: BUSINESS CYCLES 477 wages represent the sole changes in cost of labor ; for wholesale prices usually keep rising faster than wages to the very climax of prosperity.^ The source of serious trouble is that labor is a highly changeable commodity — its quality deteriorates as its price rises. Where humanitarian motives are not allowed to interfere with business policy, the less efficient employes are the first to be discharged after a crisis. Hence the relatively small working forces of depression are the picked troops of the industrial army. When a revival has grown into full prosperity, on the contrary, employers are constrained to accept any help to be had. They must take on men who are too old, and boys who are too young, men of irregular habits, men prone to malinger, even the chronic "trouble makers." Raw recruits of all sorts must be enlisted and trained in a hurry at the employer's expense. A deterioration in the average efficiency of the working forces inevit- ably follows. The genuineness of this deterioration admits of no doubt ; but its Aveight in increasing costs is difficult to determine. The foreign statistics of unemploy- ment show differences of not more than 5 or 6 per cent of the membership of reporting trade unions between the best and the worst years of a business cycle.^ Among the masses of unskilled laborers belonging to no trade union the variations in employment may be greater ; but that is a matter of conjecture.* In New York State the reported fluctuations are much wider than in France or England. For example, there is a difference exceeding 20 per cent of the membership of the reporting unions between the numbers out of work in the exceedingly dull year 1908 and the exceedingly busy year 1906.*'' Such differences leave a wide margin for the improvement of working forces during depression, and for a corresponding deterioration during prosperity. While the relatively inefficient reserve army of labor is thus called into active service, both the standing force and the reserves are kept at work long 2 The following figures from Tables 9, 11, 15, and 17 compare the index number of wages in manufacturing enterprises with the index numbers of prices at wholesale in the United States and England during two periods of business expansion. A minus sign indicates that wages or prices fell, instead of rising. United States Bnj fland ' Advance during ' Advance during the vear the- k-ear Wages Prices A Wages Prices A Year Wages Prices Wages Prices 1897 99 89 —1 100 93 1 1 1898 100 93 1 4 102 97 2 4 1899 102 103 2 10 105 104 3 7 1900 105 111 3 8 111 115 6 9 1904 116 114 1 106 108 o 1905 118 116 2 2 106 111 3 1906 123 122 5 6 108 119 2 8 1907 129 130' 6 8 113 123 5 4 In three of these four cases the rate at which the rise of prices exceeds the rise of wages declines toward the end of the prosperous period; but in only one out of the four does the rise of prices in the culminating year fail to surpass the rise of wages. 3 See Table 68, above. Compare A. de Lavergne and L. Paul Henry, le CJwmage (Paris, 1910), pp. 66-68. 4 Compare W. H. Beveridge, Unemployment (London, 1909), pp. 21, 22. 4" See p. 271 above. 478 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA hours. Now overtime labor is especially expensive to employers, not only because it often commands extra rates of wages, but also because it is tired labor. Few manual laborers possess sufficient strength and vitality to stretch out their working day from 8 or 9 to 10, 11 or 12 hours for weeks or even months at a time without suffering a decline in efficiency. At first, the closing hours of the long day, after a time, all the hours of every day find the men less alert and less energetic — unable to accomplish as much work per hour as in less busy seasons. Moreover, the quality of the output declines as nerves become fatigued. "Spoiled work" increases often at an alarming pace, and the resulting loss of materials and time threatens serious encroachments upon profits.*" Quite apart from this difficulty of overtime, men cannot be induced to work at so fast a pace when employment is abundant as when it is scarce. Employers complain that in good times their men "slow down"; employes complain that in dull times they are "speeded up." Whatever may be the merits of this chronic dispute about the fairness of the day's work given for a day's pay in either phase of the business cycle, there is abundant testimony from both sides as to the existence of a considerable difference in the energy exerted. Theoretical writers have strangely neglected this point, but the trade journals make much of it. The most trustworthy bod}^ of evidence on the subject, however, is contained in the special report made by the federal Cormnissioner of Labor in 1904 upon Regulation and Restriction, of Outpnt. This evidence is the more convincing because the influence of business conditions upon the efficiency of labor was not a subject of inquiry. Nevertheless, manufacturers and foremen, trade-union officials, and manual workers both within and without the ranks of organized labor called attention time after time to the fact that the pace of work was slower in the flush times of 1900-02 than it had been in the dull times of 1894-96 In different phrases they all gave the same explanation — ^men are less afraid of discharge when business is good. A sainple bit of testimony may be quoted. The superintendent of a company manufacturing electrical machinery said : "The absorption of 'driftwood' — that is, the taking on of men who would not be given a job in ordinary times, the temporary employment of tramps, to make it perfectly plain — is the cause of but a small percentage of the decreased output in machine shops. Five years ago men did not restrict their output, union or non-union men, because they wanted to hold their jobs, and a man would do anything and all he was told to do. Now a man knows that all he has to do is to walk across the street and get another job at the same rate of pay. During the hard times we took contracts at any price we could get, and in some places and cases men were driven at high speed to get this work out, so as to lose as little money on it as possible. Men will not keep up that speed rate in these days. "We are not restricted in our right to hire and 'fire,' but we are mighty careful nowadays not to discharge a man unless we have the very best of cause, and would not discharge unless we had a case that would preclude a visit from a union committee. We are not looking for visits, nor trouble of any kind."° ■'ti Compare Josephine Goldmark, "Fatigue and EfSciency" (New York, 1912), Chapter VI. s P. 113. Similar statements from many sources may be found on pp. 21, 22, 146, 148, 159, 160 164 165 168 222, 273, 285, 327, 380, 382, 442, 711, 712, 810, 832, 884, and 910. MITCHELL: BUSLNESS CYCLES 479 Among these various factors which co-operate to increase the cost of labor in a period of prosperity — the rise in wages, the employment of undesirables, the payment of extra rates for the tired labor of overtime, and the lessening energy put into their work by old hands and new — we can approximate a quanti- tative estimate of the first only. Unless employers grievously exaggerate, how- ever, the last is the most important, and neither of the other two factors is negligible. That this combination of advancing prices for labor and declining efficiency produces a serious increase in the cost of getting work done is beyond question. Of course, the most serious inroads are made upon profits in those industries where wages constitute a large proportion of the total outlay. A rough index of the variations in this proportion from one industry to another is afforded by the following table, which reproduces the census classification of expenses in thirty odd branches of manufacturing in 1900. Depreciation charges, insurance against mercantile and trade risks, and cost of selling products are not included by the census, so that the total expenses are somewhat understated and the proportion of wages correspondingly exaggerated. But since pn the average wages make over a fifth of the recorded expenses of manuacturing goods, an increase of 5 or 10 per cent in labor cost must cut deeply into profits unless some way of offsetting it can be found. For other than manufacturing branches we have few data regarding the relations of wages to total expenses. On the interstate railways the proportion mounts nearly to 40 per cent.' Among mines, quarries, and lumber companies the average proportion of labor cost must be nearer that of the railways than the manufacturing companies. Among mercantile establishments, both retail and wholesale, however, it is probably below the proportion in most branches of manufacturing. But the cases must be few in any line of business where the increasing price and declining efficiency of labor in periods of prosperity do not become matters of grave concern to employers. "The following figures relate to the "operating roads" in the year ending June 30, 1909: Actual amounts in Propor- millions of tions of the dollars total Salaries 86 3.8% Wages 902 39.5 « other operating expenses 662 29.0 Taxes 85 3.7 Eents for leases of other roads .... 120 5.2 Interest 354 ]5.5 Miscellaneous 75 . 3.3 Total 2,284 100.0 Compiled from the report upon the Statistics of Railways in the United States for the Tear Ending June 30, 1909. 480 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 129 CLASSimCATION OP EXPENSES IN MANUFACTURING INDUSTRIES HAVING PRODUCTS VALUED AT MORE THAN $100,000,000 IN 1900 Actual amounts in millions of dollars Proportions of the total Salaries $ All industries 404 Wages $ 2,322 Misc. Expenses $ 1,028 Cost of Materials $ 7,345 Total $ 11,099 Salaries % 3.6 Wages % 20.9 Misc. Expenses % 9.3 Cost of Materials % 66.2 Agricultural implements 8 22 11 44 85 9.4 25.9 12.9 51.8 Boots and shoes 8 59 11 170 248 3.2 23.8 4.4 68.6 Bakeries 6 28 10 95 139 4.3 20.1 7.2 68.4 Carpentering 2 71 49 142 264 .8 26.9 18.5 53.8 Carriages and wagons 4 30 6 57 97 4.1 30.9 6.2 58.8 Eailway shops 6 96 6 110 218 2.8 44.0 2.8 50.4 Car building 2 23 3 70 98 2.0 23.5 3.1 71.4 Cheese, butter, etc. 1 6 2 109 118 .8 5.1 1.7 92.4 Clothing, men 's 14 79 .•52 198 343 4.1 23.0 15.2 57.7 Clothing, women '? 7 33 12 85 137 5.1 24.1 8.8 62.0 Copper smelting 1 9 2 122 134 .7 6.7 1.5 91.1 Cotton goods 7 X7 22 177 293 2.4 29.7 7.5 60.4 Flour mills ."i IS 10 476 509 1.0 3.5 2.0 93.5 Foundries 32 182 41 286 541 5.9 33.6 7.6 52.9 Furniture 7 43 n 65 126 5.6 34.1 8.7 51.6 Iron and steel 12 121 32 522 687 1.7 17.6 4.7 76.0 Lead smelting 1 5 1 144 151 .7 3.3 .7 95.3 Leather 3 23 7 155 188 1.6 12.2 3.7 82.5 Liquors, malt 13 26 109 52 200 6.5 13.0 54.5 26.0 Lumber 11 105 18 318 452 2.4 23.2 4.0 70.4 Planing mills 5 33 / 100 145 3.4 22.8 4.8 69.0 Masonry 2 53 31 87 173 1.2 30.6 17.9 50.3 Paper 5 21 10 71 107 4.7 19.6 9.3 66.4 Petroleum refining 2 7 3 103 115 1.7 6.1 2.6 89.6 Plumbing 3 32 5 65 105 2.8 30.5 4.8 61.9 Printing 36 84 56 87 263 13.7 31.9 21.3 33.1 Silk 3 21 10 62 96 3.1 21.9 10.4 64.6 Slaughtering, etc. 10 34 24 687 755 1.3 4.5 3.2 91.0 Sugar refining 2 7 7 223 239 .9 2.9 2.9 93.3 Tin smithing 3 *22 5 50 80 3.7 27.5 6.3 62.5 Tobacco — chewing, etc. 4 7 48 35 94 4.8 8.3 57.2 41.7 Tobacco — cigars 5 41 31 58 135 3.7 30.4 23.0 42.9 Woollen goods 3 25 7 71 106 2.8 23.6 6.6 67.0 Worsted goods 2 20 7 77 106 1.9 18.9 6.6 72.6 Twelfth Census of the U . S., Manufactures, Vol. 1, Table 1 MITCHELL: BUSINESS CYCLES 481 4, The Cost of Materials According to the preceding table, the cost of materials exceeds wages in every one of the leading branches of manufacture, and in a majority of cases is over twice as large. Indeed, on the average it makes practically two-thirds of the total outlay. If wares for re-sale be substituted for materials, this pro- portion must run far higher in wholesale stores, while in retail shops it cannot be much lower than in factories on the average and may well be considerably higher. Even the transportation companies and enterprises in the extractive industries have to buy vast quantities of current supplies. Hence an increase in the cost of materials, wares, or supplies is often an increase in the largest single item of expense, and always an increase in an important item. The relative fluctuations in the prices of those commodities which are bought and of those which are sold are therefore of great, in many cases of decisive, impor- tance in determining profits. Concerning these relative fluctuations, our definite information consists of index numbers for raw materials, partially manufactured products, and finished goods; also for the same commodities at wholesale and at retail.' Now this statistical evidence points to the conclusion that what must be taken as buying prices creep up on selling prices during a period of prosperity.' Of course this movement, like the others which have just been traced, threatens a reduction of profits. ' Chapter IV, i, 3, 5, 6, and 9. 8 The evidence may be summarized as follows. The figures are based on Tables 3, 5, 6, 7, and ]3. Minus signs indicate that prices fell instead of rising. Number of points by which relative prices rose 1896-1900 1904-07 1908-09 25 foods at wholesale in the United States 17 9 25 foods at retail in the United States 6 11 23 foods at wholesale in England 10 6 2 19 foods at retail in England 8 10 23 foods at wholesale in France 11 12 36 foods at retail in France — 2 7 — 5 20 raw materials 33 22 9 20 manufactured products 23 20 4 5 raw materials 30 10 16 5 partly manufactured products 20 5 10 5 finished commodities 11 12 1 45 raw producers' goods 30 22 9 28 manufactured producers' goods 24 18 — 1 18 raw mineral products 27 24 2 23 manufactured mineral products 20 9 10 raw forest products 17 27 13 9 manufactured forest products 15 19 — 1 9 raw animal products 29 21 20 18 manufactured animal products 20 13 8 18 raw farm products 35 9 7 40 manufactured farm products 16 15 — 3 482 MEMOIRS OV THE UNIVERSITY OF CALIFORNIA "V\^hile a difficulty of this character seems to be encountered in most branches of business it is likely to become peculiarly acute in those manufacturing indus- tries which use animal and farm products as their leading raw materials. For, following up a suggestion of Sombart's, we have found that these classes of products are more erratic in their price fluctuations than are the products of mines and forests." Hence an uncommonly large speculative risk must be borne, or insured against, in such branches of trade as meat packing, flour milling, cotton spinning, woollen weaving, tanning, etc. Of course this risk exists during all phases of the business cycle, but it is augmented in prosperity by the necessity of carrying larger stocks of raw materials. The census indi- cates that more than three-fourths of all the "materials purchased in the raw state" by American factories in 1900 belonged to this class which is peculiarly unstable in price." 5. The Cost of Bank Loans Interest upon short-time loans is a minor element of expense in manufac- turing operations, according to the American census;" but it must be a much more important matter to the mercantile classes. Certainly it is among the costs of doing business which trench upon profits in the later stages of pros- perity ; for the relative rates of discount rise at a much more rapid pace than the index numbers of wholesale prices — to say nothing of retail prices." But this is a topic of many aspects, which will require more adequate treatment in a later section." 9 See Chapter IV, i, 6. 1" The sources of raw materials are given as follows: Prom farms $1,941,000,000 Prom forests 119,000,000 Prom mines 320,000,000 Prom the sea 10,000,000 Prom all sources $2,490,000,000 Twelfth Census of the United States, Manufactures, Part I, p. exxxv. The ' ' farm ' ' products of this class- ification include both the animal and farm products of the tables in Chapter IV. 11 ' ' Rent of offices, insurance, interest, etc., ' ' all put together made only 6.4 per cent of the total manu- facturing cost in 1900. Op. cit., compare the data in Tables XLIX and I. 12 A conspectus of the evidence obtained by comparing figures from Tables 11 and 28 follows. In order to avoid the effect of crises in raising interest rates, the comparisons are made between the levels in the last year of depression and the last year before the crisis. A minus sign indicates a fall instead of a rise. Number of points by which relative prices and relative discount rates have risen A. 1896-99 1904-06 Wholesale prices in America 14 8 Discount rates in New York — 38 31 Wholesale prices in England 12 11 Market discount rates in London 85 66 Wholesale prices in Prance 15 11 Market discount rates in Paris 53 27 Wholesale prices in Germany 14 16 Market discount rates in Berlin 47 30 The one exception to the rule that discount rates rise faster than prices cannot be wholly explained away by the tension in the New York money market caused by the free-silver campaign of 1896. ' If comparison be made between 1897 and 1899, wholesale prices are found to have risen 14 points and discount rates only 10 points. 13 See the section upon "The Tension in the Money Market." MITCHELL: BUSINESS CYCLES 483 6. The Declining Economy of Business Management One final matter may be mentioned: prosperity is unfavorable to economy in business management. When mills are running overtime, when salesmen are sought out by importunate buyers, when premiums are being offered for quick deliveries, when the railways are congested with traffic, then neither the over-rushed managers nor their subordinates have the time and the patience to keep waste down to the possible minimum. The pressure which depression applies to secure the fullest utilization of all material and labor is relaxed, and in a hundred little ways the cost of doing business creeps upward. Still less can attention be given to the adoption of improved methods of organization; for changes in habitual routine are always the source of some confusion and delay when they are being introduced, and when an enterprise has all the busi- ness it can handle delay is the one thing to be avoided. Even when the feasi- bility of making an important improvement is demonstrated to the managers of an enterprise, they often defer its introduction to a less busy season. Progress in industrial technique and in business methods would be slower than it is if business communities were always prosperous. II. Industrial Equipment and the Investment Market 1. The Consequences of Increasing the Indtostrial Equipment While the increasing costs of doing business are threatening to encroach upon profits in almost every branch of trade, the rapid extension of industrial equipment is breeding other stresses. It has been shown that the repairing of old and the building of new equip- ment for the handling of business is greatly accelerated by the return of pros- perity after a period of depression." This movement gains momentum as prosperity becomes more intense. N'ow the laying of new^ railways, the erection of new office buildings, factories, and power plants, the opening of new mines, quarries, lumber camps, and the like, stimulates all the branches of business concerned with construction work. Not only contracting firms, but also cement mills, brickyards, structural steel works, machine building companies, lumber- yards, etc., etc., become busy. Direct statistical evidence is meager; but there is little doubt that the volume of business done by such enterprises regularly shows a higher ratio of increase in prosperity than is common among estab- lishments which, deal either in staple consumers' goods, or in the current 1* See Chapter X, v, and the tables of Chapter VIII, ii. 484 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA supplies used by business enterprises/" Of course, the constant necessity for repairs and renewals provides a good deal of work for these construction trades at all times, and there is never a year when considerable extensions of old and construction of new plants are not undertaken. But when to this regular work of maintaining the efficiency of the existing equipment and to these odd contracts for new construction there is added the rush of orders from the many enterprises which see their own trade outrunning their facilities and from the numerous new projects launched on the rising tide of prosperity, then the construction trades have a season of activity which few of the industries for which they are working can match. It follows at once that these trades add a sharpl^^ increasing demand to the market forces which are swelling the volume of business and lifting the level of prices. For a while their demand for commodities is not accompanied by a corresponding increase in the market supply. What they are making in the way of equipment has been sold in advance to business enterprises and does not come on the market as a factor opposing the advance of prices. While this condition lasts, the demand of construction trades has an especially stimulating efPect upon the price level. But, at the same time, the bidding of these trades for labor and materials aids in driving up the costs of doing business in all the various ways described in the preceding section. A second consequence of the situation is that the movement toward pro- viding new industrial equipment is likely to become particularly rapid in the 15 The production of pig-iron, for example, undergoes much wider fluctuations between seasons of prosperity and depression than the production of coal, as the following figures from Tables 50 and 51 show. Relative Production of Pig-Ieon and Coal in the United States, United Kingdom, France, and Germany By Years, 1890-1910 Average actual production in 1890-99^100 United A States United Ki ingdom France Germany A Year Pig-iron Coal Pig-iron CoaT Pig-iron Coal^ Pig-iron Coal 1890 98 82 99 95 88 93 79 83 1891 89 88 93 97 88 93 79 88 1892 98 93 84 95 93 93 84 86 1893 76 95 88 86 93 89 84 89 1894 72 89 93 98 93 96 91 92 1895 100 100 97 99 93 100 93 97 1896 92 100 109 102 107 103 109 105 1897 104 105 111 106 112 107 117 113 1898 126 114 108 106 116 114 124 119 1899 145 133 118 115 116 114 138 127 1900 147 141 113 118 126 117 145 139 1901 170 153 99 115 112 114 134 143 1902 190 157 109 119 112 107 145 140 1903 192 186 112 120 130 121 171 152 1904 176 183 109 121 135 121 171 158 1905 246 205 121 124 140 125 185 162 1906 270 216 127 131 153 121 209 180 1907 276 251 127 140 163 128 219 192 1908 170 217 114 137 158 132 200 201 1909 276 240 121 138 163 132 214 203 1910 292 262 126 138 186 135 252 208 Averages 1890-99 100 100 100 100 100 100 100 100 1900-09 211 195 115 126 139 122 179 167 MITCHELL: BUSINESS CYCLES 485 very trades whose business it is to furnish such equipment. The productive capacity of the existing enterprises which at the time of business revival is not used at all or not used to the full is especially large in these lines. But when orders for construction work do begin to come in, they come so fast and are so large and require such quick execution that this wide margin of reserve power is often exhausted in a year or less. Then the foundries, machine shops, cement mills, brickyards, and all the rest become the most anxious of all enter- prises to install new equipment in the shortest possible space of time ; for they cannot secure contracts unless they can guarantee prompt deliveries, and the season when contracts are to be had may be brief. Indeed, the ProduMivmittel- industrien may well show a more rapid expansion of equipment than any of the trades to which thej^ cater." Further consequences appear as soon as sections of the new industrial equipment are finished and put into active service. Then the enterprises which own the new equipment begin on the one hand to hire operatives, buy raw materials, etc., etc., and on the other hand to pour their products upon the market. This activity serves both to strengthen the forces which are already raising the costs of doing business and to obstruct the advance of selling prices. But, since new construction is not underta]?:en on a grand scale until a business revival has made considerable headway, and since the work of building and installing the elaborate equipment of to-day lasts months if not years, pros- perity has neared its high tide before the new equipment begins to aggravate seriously the encroachments of costs upon profits. 2. The Development of Stringency in the Investment Markets The extension of industrial equipment is financed in part by funds taken out of the current income of business enterprises and re-invested." But the bulk of the necessary funds is obtained by borrowing, by inducing those already interested in enterprises to advance additional capital, or by bringing in new stockholders. As indices of how much money is raised for such purposes, we have the statistics of applications for loans, sales of bonds and stocks, and fluctuations in the interest rate upon long-term loans.'' After a year or two of the heavy borrowings of prosperity, this interest rate usually rises to what is regarded by the business community as a high 16 They may; but they are far from doing so always. In the interests of symmetry, certain writers like SpiethofC have tried to show that this group of trades is regularly the chief seat of over-investment during prosperity and the chief seat of weakness in the subsequent crises. But less partial examination of the very evidence on which Spiethofl mainly relies shows that the lead in the German "boom" of 1896-99 and in the collapse of 1900-01 was not held by industries which are most exclusively devoted to the production of means of production. See, for example, W. Sombart, Schriften des Verems fur SocialpoUUh, vol. CXIII, p. 130; .T. Lescure, Des Crises gen6rales et p6riodiques de surproductiort, Paris, 1907, p. 516. 17 See Chapter VIII, ii, 5. 18 Chapter VIII, ii, 2 and 3; Chapter IV, iii, 1, 2, and 4. 486 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA level," and complaint begins to be heard of a "scarcity of capital." This is one of the most regularly recurring phenomena of the months which precede the outbreak of a crisis. The popular explanation of this alleged scarcity is that too much capital has recently been locked up in fixed investments, and that the remainder of free capital is insufficient to meet the current needs of business. But all that the available data establish is that the supply of funds forthcoming for long loans is no longer equal to the demand at the old rate of interest. It does not necessarily follow that saving has declined, or that the heavy investments of the preceding year or two were made out of past accumulations which are now approaching exhaustion. The stringency may quite as well be due to the diversion of an increasing proportion of the funds seeking investment into other channels than those provided by the loan market. Active business men are likely to cease looking elsewhere for investments for their savings when their own special enterprises have in sight more business than can readily be carried with the available working funds. Others may be deterred from lending at the old rate because. the advancing price level is reducing the purchasing power of fixed money incomes, or because they think it may reduce the pur- chasing power of the principal when it comes to be repaid. Still others who do not think their interests out so clearly may be impressed by the patent fact that bonds have been falling in price. The statistics and market reports show that the purchases of stock increase while the purchases of bonds are falling off.^" But, whatever the cause may be — a problem which cannot be settled until more definite knowledge is obtained concerning the fluctuations of savings and the promptness with which savings are invested — the effect is certain. The terms exacted for long loans become onerous. 3. The Decline of Investment Borroiving When the market rate of interest for long-term loans has risen one-quarter, one-half, or, on some classes of business, 1 per cent above the level which had prevailed during the preceding period of depression, the financial managers of large business corporations begin to restrict their borrowings to the nar- rowest possible limits. Two shifts, indeed, are open to them : they may endeavor to follow the change in the appetite of investors by raising more capital on stocks and less on bonds, and they may take up money on one-, two-, or three- year notes at a high rate of discount instead of selling long-term bonds. That 1" An interesting exception is aflforded by the experience of the United States in 1897 to 1902 See Chapter IV, iv, V. 20 Compare Chapter VIII, ii, 2, and footnote 21, below. MITCHELL: BUSINESS CYCLES 487 they adopt both of these courses freely is proved by the evidence." But it is also clear from the tables of Chapter VIII that the volume of public appli- cations for capital usually suffers a heavy decline in the year preceding a crisis. Of course this decline means, not that the desire on the part of business enterprises to secure funds has shrunk, but that the men in control are unwill- ing to saddle their companies for a long series of years with the heavy fixed charges which would result from borrowing under the prevailing conditions. They prefer to defer the execution of their plans until funds can be procured on better terms. 4. The Check upon Orders for New Construction High rates of interest, however, are not the sole, in many cases they are not even the most important, cause for deferring the execution of plans calling for ncM^ construction. The high prices demanded by contractors as the climax of prosperity approaches frequently count for more. Evidence has been given that many contracts for permanent improvements are let in the early days of revival, or even in the late days of depression." Much of the work then undertaken requires a year, two years, three years, or even more to execute. To safeguard themselves against an advance of prices, the firms which are contracting to construct houses, office buildings, factories, machinery, roadways, sewers, canals, docks, bridges, and the like enter into sub-contracts with enterprises which provide the necessary iron, steel, copper, lumber, cement, brick, tile, stone, etc. When it is feasible, the latter enterprises in their turn ofteil enter into contracts with still other houses from which they buy materials or supplies. Now most of these enterprises bind themselves with- out, definitely knowing how much business other enterprises in the same branch of trade are booking. It often happens, therefore, that contractors and their 21 The following figures, compiled from Table 113, show the total amount of securities newly listed each year on the New York Stock Exchange, and the proportions borne to the total by bonds and by stocks. Amount Per cent of in millions Year of dollars Stocks Bonds 1896 359 44.8% 55.2% 1891 288 33.7 66.3 1892 275 36.4 63.6 1893 233 40.3 59.7 1894 222 16.7 83.3 1895 244 31.6 68.4 1896 224 34.4 65.6 1897 141 37.6 62.4 1898 315 22.2 77.8 1899 467 66.6 33.4 1900 445 66.7 33.3 It will be noticed that the proportion of bonds rises in the years of depression and declines rapidly in the years of full prosperity. . , , ■ ^ ■ j_-, j_- i.^ t j. ^^ The substitution of short-term notes for bonds was particularly prominent in the tight money markets ot 1903 and 1907. See the current issues of the financial journals, and for summaries the Financial Review, 1904, p. 27; 1908, p. 32. 22 See Chapter X, v. Amount Per cent of in millions of dollars A Year Stocks . Bonds 1901 650 66.2% 33.8% 1902 449 55.9 44.1 1903 365 47.4 52.6 1904 551 22.0 78.0 1905 694 18.0 82.0 1906 540 43.9 56.1 1907 406 39.2 60.8 1908 773 16.0 84.0 1909 1,010 29.4 70.6 1910 877 34.8 65.2 488 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA sub-contractors sell to investors more construction than can readily be executed within the contract time. This condition of trade is discovered when the con- tractors look about for labor and materials to perform the work they have undertaken. Then prices rise rapidly and large bonuses are often offered for quick deliveries. One result is that many building contractors and manufac- turers find that what promised to be lucrative bargains turn out to be losing bargains. More important is the further result. When bids are invited for additional construction, contractors are forced to ask much higher prices than those which they would have asked a year or so earlier.''^ Of the projects for permanent improvements some are so pressing that the contracts are let despite the onerous terms demanded. But there are other projects, many and large, which can be and are postponed to a season when the initial outlay will be less. Thus the high costs of construction which char- acterize a period of prosperity combine with the high interest charges upon long loans to reduce the number and the size of fresh contracts let. Activity does not slacken at once in the trades which do contract work and furnish materials. For the finishing of the contracts already in hand may keep everyone as busy as ever for several months to come. Indeed, the mills making structural steel, etc., may be working under high pressure to get out work on which bonuses for quick delivery are expected at the very time their order books for the coming quarters are scantily filled, and while their selling agents are. having great difficulty in drumming up custom." This change in the situation promises to relieve one of the stresses which is becoming acute. The provision of new equipment will decline, and therewith both the increase of competition for an already scant supply of labor and materials and the increase of the new products seeking sale. But at best this relief refers only to the pace at which the stress is accumulating. Moreover, the relief lies in the future, and as a rule it is not felt until after the crisis has occurred. And, worst of all, this problematical relief to the enterprises which would have to meet the competition of the new equipment is offset by the sudden apparition of acute strain approaching in the industries which provide equipment. Particularly when they have extended their own plants to handle the recent fiood of contracts do they suffer when this tide recedes. How serious is the danger which their threatened embarrassment entails for the whole com- munity of business enterprises will appear in the sequel.^'' 23 Compare Mr. Hull 's theory of industrial depressions, summarized in Chapter I, ii, 8. -* See, for example, the current weekly reports of the Iron Age in the summer of 1907. The following figures showing the unfilled orders on the books of the United States Steel Corporation at the end of the month are significant of the general trend: 1906 — December 8,500,000 tons 1907— March 8,000,000 tons June 7,600,000 tons September 6,400,000 tons December 4,600,000 tons -^' See section iv, 2, B., and section v, below. MITCHELL: BUSINESS CYCLES 489 III. The Tension in the Money Market 1. The Demand for Short-Term Loans The advance of interest rates in a period of high prosperity is relatively much greater in the money than in the investment market.'" For, while certain of the factors which drive up interest rates operate in both markets, others are peculiar to the market for discounts. It has already been pointed out that the volume of bank accommodation needed, by the business community grows not only with the increase in the physical volmne of business but also with the rise of prices." Were no other factor to be considered, it would therefore be cumulative at a high rate. But there are other factors. The expectation of large profits, coupled with the prevalence of an opti- mistic bias in judging business chances, disposes men of affairs to undertake as much business as possible upon their working capitals. Indeed, not a few venture beyond the line of safety, and failures ascribed to inadequacy of capital become numerous.^* Of course, this effort to make one's own capital support as much business as possible involves borrowing a larger proportion of the funds required than is common in periods of depression or revival. That is to say, the demand for bank loans increases even more rapidly than the pecu- niary volume of business. Among the factors which differentiate the demand for short-term loans from the demand for long-term loans is a lesser degree of elasticity. The volume of discounts asked for does not contract so much as the volume of investment borrowings when interest rates rise. Many of the investment projects require that everything to be used shall be bought new. Then the whole annual cost of the undertaking may be treated from the accountant's viewpoint as the interest on the sums invested. But in the majority of the short-term loans the practical business problem relates to the additional service which may be got by the use of additional funds from equipment and labor which are already on hand and for which the cost has already been allowed. Then the interest on the projected loan cannot be treated as the whole expense. On the contrary, it may be a minor item, and an advance of the rate by 1 or 2 per cent may make so small a fraction of the whole cost as not to deter men from borrowing. Again, in borrowing for long periods, the business man must consider probable selling prices in the years to come. Experience teaches him that it is folly to expect an indefinite continuance of the active demand for his goods and the high prices which prevail during the "boom." Hence his enterprise, 28 Compare the relative rates of discount in Table 28 with the relative rates of bond-yields in Table 27. 27 See Chapter X, iii, 3. 2s Compare Chapter XII, ii, 4. 490 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA \vhicli for the jDresent might support heavy fixed charges without disaster, will face more serious difficulties in the next period of depression. But in bor- rowing for 60 or 90 days, or even for a year, the business man is prone to count upon being able to turn over his goods promptly at prices equal to or higher than those prevailing at the moment. Hence he has less reason to hesitate because of an increased cost of loans. Finally, the temporary shifting of a part of the investment demand for loans to the money market by the substitution of short-term notes for bonds increases the demand for bank accommodation.^" For these notes are "peddled" not only among individual investors, savings banks, insurance com- panies, and others who might have bought bonds, but they are offered also to commercial banks and there added to the applications for discounts coming from the regular classes of local customers. 2. The Supply of Short-Term Loans Directly or indirectly the supply of short-term loans comes chiefly from the banks. ^^ Since the commodity loaned by a bank is usually some form of bank credit, an expansion of loans causes a corresponding expansion in the volume of demand liabilities.^^ And since these liabilities to pay on demand must be protected by an adequate stock of cash, the amount which the banks of any country can lend is ultimately limited by the amount of monej^ which they hold.'^ How, then, does prosperity affect the amount of money held by the banks f It is only for the United States that we have regular statistics concerning the stock of money in the country and the distribution of this stock between the banks and the public. The influence of prosperity upon the total stock of money available for use will be discussed presently. For immediate purposes the pertinent fact is that even when the total stock is growing most rapidly, the American banks are unable to prevent their quota from being diminished by the activity of business. Of the money withdrawn from the banks day by day and Aveek by week for paying wages and the like, the greater part flows back in a few days through the deposits of shopkeepers, street-car companies, restaurants, places of amusement, etc. But not all of it flows back. For when employment is full and wages are rising, millions of men carry each a little -'■' See section ii, 3, of this chapter. 30 Discount houses and bill brokers either do a banking business themselves, depend largely upon banks for their funds, or act merely as middlemen between the borrower and a lending bank. Even the credits extended to their customers by American mercantile houses scarcely form an exception; because the lenders usually have recourse to banks for aid in carrying such accounts. ">i Compare the tables in Chapter VII showing the concomitant fluctuations of bank loans and deposits, or bank loans and total demand liabilities. 32 The validity of this statement is not affected by such long-standing differences of banking organization and practice as make it possible, for example, to sustain a far greater volume of demand liabilities with a given sum of money in England than is possible in America. MITCHELL: BUSINESS CYCLES 491 more money than when times are dull. And when trade is active thousands of retail shops carry each a little more "change" than when daily sales were smaller. Hence it is that the table relating to the distribution of the money in circulation between the banks and the public shows that the banks' proportion of the total declines gradually from the time when depression begins to relax to the time when prosperity reaches its zenith.^^ This loss of money by the banks to the public is sometimes more than offset by an increase in the stock divided between these two claimants. For example, the actual amount of lawful money in the clearing-house banks of New York and in the national banks as a whole increased during the prosperous years 1897-99. At other times the decline in the quota exceeds the gain from the total to be divided. Such was the case in 1905-06 when both of these groups of banks found the actual amount of their cash declining.^* But, whatever is the net change in the actual amount of money in the banks, prosperity checks the possible expansion of short-time loans in so far as it increases the proportion of money suspended in active circulation at the expense of the proportion held by the banks as reserves. 3. The Development of Stringency Since the demand for short-term loans expands at a peculiarly rapid rate, since the supply of these loans is limited by the amount of cash in the banks, and since the banks lose cash to the public, prosperity ultimately produces a tense money market. The coming of this result is deferred by the elasticity of the limit set by cash reserves upon the expansion of bank loans. In times of depression bank reserves become larger in proportion to demand liabilities than bank managers tbink needful, so that periods of prosperity open with a considerable excess of lending power above current demands.'"' But, owing to the processes just traced, the excess is gradually used up, and after a time bank managers are facing the difficult problem of precisely how much farther it is prudent to go in the way of lending additional credit on the basis of their available cash. In America hard and fast rules regarding the minimum ratios of reserve to be held are imposed by law upon all the national and many of the state banks. But, on the one hand, these rules are administered with much circumspection, and, on the other hand, business judgment affirms that the circiunstances of the time, the character of a bank's clientele, its relations with other banks, and the liquidness of its assets other than cash ought always to be taken into account 33 See Chapter VI, iv. 34 See Tables 82, 83, 85, and 86. 35 See Chapter VI, iv, and XHI, i, 2, D. 492 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA ill determining whether it is really overstepping the limits of prudence. Hence there is iii practice considerable leeway within which the responsible officials exercise their own judgment. The net resultant of this situation as shown by bank reports is that in periods of prosperity the expansion of loans regularly proceeds at such a pace as to reduce the ratio of reserves to demand liabilities by a considerable though variable margin. The national banks of America, for example, have allowed their i-eserve ratios to fall from 3 to 6 per cent below the high records of the years preceding the revival of activity. The clearing-house banks of New York have let their ratios drop below 26 per cent, and frequently a trifle below the accepted minimum of 25 per cent.^° Just where bankers will draw their line against further expansion of loans it is therefore impossible to say. But it is certain that they will draw such a line firmly somewhere withiu fairly definite limits. As these limits are approached the bankers put up their dis- count rates and become more exacting in their acceptances of new applications for loans. Business men then find that short-term loans are both more expensive and more difficult to secure. That this development of stringency in the money market imposes a severe strain upon business prosperity cannot be doubted; but its precise bearings must be considered in connection with the other strains arising from the increas- ing costs of doing business, the tension of the market for bonds, and the difficulties faced by the enterprises producing industrial equipment. Before attacking this central problem it is necessary to dispose of a point which was recently mentioned only to be set aside — the inter-relations between prosperity and the quantity of money in circulation. 4. The Inter-relations Between Prosperity and the Quantity of Money in Circulation With the quantity of gold which passes into monetary use prosperity and its consequent developments have a highly complex set of inter-relations. (1) Tlie advance in the cost of supplies, the decline in the efficiency of labor, etc., cause costs to encroach upon profits in gold mining more seriously than in most other lines of business. For the gold-mining company cannot increase the selling price of its product one jot. Hence the increase of the gold output is somewhat checked. Certain of the poorer mines may be closed, and in the •-•6 Concerning the New York banks, see Chapter VLt, i. The following figures from Table 89 refer to the national banks: Depression Prosperity Feb., ]894 26.9% 19.6% Sept., 1895 Mar., 1897 24.7 18.7 Sept., 1899 June, 1904 18.1 14.8 Nov., 1906 May, 1908 18.6 1.5.1 Mar., 1910 The tables for national banks in country and city districts show that this policy is followed in all parts of the United States. The foreign statistics, though scanty, yield similar results. See the various sections of Chapter VTT. MITCHELL: BUSINESS CYCLES 493 better mines low-grade bodies of ore are temporarily passed over." (2) Of the gold which is extracted, a decidedly larger quota is diverted from coinage to industrial uses by the growing demand which prosperity begets for jewelry, etc.^^ (3) Of the gold which is used as money in any country, a larger part is likely to be exported if prices have risen more rapidly there than in other commercial nations, because such a state of the markets stimulates imports of merchandise and checks exports.'" All of these influences act in the direction of reducing an increase or augmenting a decrease in the quantity of gold money. On the other hand, (4) prosperity stimulates the production of gold by spread- ing a taste among investors for speculative securities promising a high rate of return, thereby making it easier to raise capital for developing new mines." (5) Further, the adverse influence of prosperity upon the balance of payments on merchandise account may be more than offset by its favorable influence upon the balance on investment and banking account. For prosperity encourages the sale of securities to foreign capitalists, and by establishing high discount rates in the local money market encourages the international banking houses to keep large balances in the financial centers." Thus the net effect of pros- perity upon the quantity of gold coin depends upon two opposing sets of factors of which the relative strength varies from time to time. But, whatever this net effect may be, in recent times it has certainly been overshadowed by the influence of other factors which are not directly dependent upon the condition of business — the progress of mining and metallurgical technique, the discovery of new gold deposits, and the maintenance of order in the chief producing districts.*^ The supply of paper money issued by the government is usually controlled by imperious necessities of public finance or by large issues of public policy, with neither of v^hich the changing phases of business cycles have more than an indirect connection. As for the quantity of paper money issued by the banks, the influence of prosperity depends largely upon the provisions of law regarding issue, security, and redemption. These provisions are too elaborate to be rehearsed here. The present purpose may be met, however, by recalling the conclusion established by the statistics of bank-note circulation presented in Table 76. But a slight degree of correspondence appears between the average quantity of bank-notes outstanding in each year and the fluctuations of busi- ness activity — a conclusion which holds for the elastic systems of France and Germany as well as for the inelastic systems of America and England." 37 See Chapter VI, i. 38 See Chapter VI, ii. 39 See Chapter V, v. 40 See Chapter VI, i. 41 See Chapter VI, ii. 42 See Chapter VI, i. 43 See Chapter VI, iii. 494 MEMOIRS OP THE UNIVERSITY OP CALIPORNIA Not until we come to deposit currenc)^ do we find tlie influence of prosperity upon the quantity of the circulating medium to be both clear in its bearing and decisive in its weight. By making business men more anxious to borrow and banks more willing to lend, good times produce a rapid expansion of credit currency. In the one country where the quantities can be measured, this expansion has regularly shown a higher ratio than the concomitant expansion of bank reserves or even of the total monetary stock." Prosperity also causes the credit currency, and in less measure money, to circulate more rapidly.*^ In these two ways business activity automatically provides means by which the vastly increased payments required by the expanding pecuniary volume of trade are readily effected. So much concerning the effect of prosperity upon the quantity of the cur- rency. What of the counter effects of changes in the quantity of the currency upon prosperity! Here the one important factor to deal with is changes in the supply of gold money, since gold is nowadaj^s the vital element in bank reserves, and since the supply of gold is dominated by factors not intimately related to business cycles. An abundant supply of gold favors a revival of business activity by giving the banks liberal reserves and thereby increasing their ability to lend credit at moderate rates of intei'est. This feature of the situation grows more important as the revival ripens into full prosperity. For the banks usually have a considerable reserve of lending power in the earlier stages of revival, even though the gold supply has been contracting ; while, as the climax of pros- perity approaches, the banks are usually straining every resource to meet the heavy demand for loans, even though the gold supply has been expanding. That is, an increasing supply of gold favors the continuance of prosperity by retarding the accumulation of one of the stresses which prosperity breeds — namely, tension in the money market. IV. The Decline of Prospective Profits 1. The Problem of Defending Profits against the Encroachments of Costs The gist of the first part of this chapter is that prosperity breeds an increase in the cost of doing business — an increase which threatens to diminish profits. The decline in supplementary costs per unit ceases; equipment of less than standard efficiency is brought back into use ; the price of labor rises while the efficiency of labor falls; the cost of materials, supplies, and wares for resale advances faster than selling prices ; discount rates go up at an especially rapid ** See Chapter VI, v. 45 See Chapter VI, vi. MITCHELL: BUSINESS CYCLES 495 pace, and all the little wastes incidental to the conduct of business enterprises grow steadily larger. So far all is clear. But it has not been shown that this rise of money costs necessarily involves a fall of money profits. For do not the higher cost prices paid by any person mean higher selling prices for someone else? If so, does not an increase of costs promise to augment the net incomes of sellers just as much as it threatens to reduce the net income of buyers'? Is there, then, any real danger that the average rate of profits, taking all business enterprises together, will be encroached upon? (1) With reference to those items among the increasing costs which consist of higher prices paid by one set of business enterprises for goods bought from other enterprises it is indeed true that the increase of expenditures is just balanced by the increase of receipts. But, though from the accountant's view- point the gains and losses are equal, equality does not make them negligible. For the additions to cost and the additions to income are most unevenely dis- tributed — a condition which threatens to disturb confidence by bringing serious loss upon certain enterprises. (2) So far as the additional costs consist of higher prices paid to persons not belonging to the business community proper, such as wage-earners and farmers, it is by no means certain that other enterprises will get back what any given enterprise pays out. For the additions to money income scattered among millions of men are not all spent promptly in ways which add to the profits of business enterprises. (3) Against the remaining items of increasing cost — the use of old-fashioned equipment, the diminishing efficiency of labor, and the declining economy of business management — against these losses no compensating gains can be set. They represent a serious addition to the expense of accomplishing given results in most if not in all establishments — an addition which constitutes an imme- diate encroachment upon profits whenever it occurs and which benefits no other enterprise in anything like equivalent measure. Thus there is no escaping the conclusion that the increase of costs makes grave difficulties for the Avhole com- munity of business as well as for particular enterprises. But, granted so much, there still remains a problem to be faced. Why cannot business men defend their margins of profits against the threatened encroachments of costs by marking up their selling prices sufficiently? That simple expedient would remove the difficulty at a stroke. Once squarely put, this question is not easy to answer squarely. It sounds well to say that the advance of selling prices cannot be continued indefinitely. But this plausible statement challenges the abrupt question : Why not ? The only rejoinder which lies upon the surface is that the advance of the price level would ultimately be checked by the inadequacy of the quantity of money. Indefinitely high prices necessitate indefinitely large credits for merchants. 496 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA manufacturers, etc., and these credits must be sustained by indefinitely large bank reserves. Since the quantity of money has a limited ratio of increase, the time must come, soon or late, when the existing reserves would seem scanty in comparison with the volume of demand liabilities reposing upon them. Then confidence in the solvency of the banks would become impaired, and the whole movement of expansion and advancing prices would end in a grand panic. As a sketch of what might happen, this analysis has a certain academic interest. But other causes check the rise of prices before the banks have allowed them- selves to be jeopardized in this fashion. And, what is more to the point, this analysis does not really bear upon the problem in hand. For the problem is not, What prevents the general level of prices from rising indefinitely? but. What prevents business enterprises from maintaining a profitable adjustment between the advance of two sets of prices, those which constitute costs and those which constitute returns 1 To shoAV wlw a rise in the general level of all prices must come to an end is not to explain the acciunulation of stresses betweeia these two parts of the system of prices. Thus we come back to our problem. During the earlier stages of prosperity nci insviperable obstacle is encountered in defending profits hj raising selling prices. What processes create such obstacles in the later stages? 2. Flindraiices to the Continued Advance of Selling Prices A. PUBLIC EEGULATION, CONTRACTS, AND CUSTOM In certain important and many unimportant lines of business the encroach- ments of costs upon profits cannot be prevented because governmental regu- lation, established custom, business policy, or long-term contracts impede the advance of prices. American street railways, for example, are usually prohibited by the condi- tions of their charters from charging more than a five-cent fare, and even when legally free to do as they like they seldom find it good policy to depart from the customary price. Gas and electric-lighting companies, water companies, and the like generally have their basic rates fixed by agreements with the public authorities, and cannot raise their tariffs except by negotiation at considerable intervals. Enterprises in this position find their share in prosperity limited to the advantage derived from an increase in the physical volume of their business. Often their fixed charges make so large a proportion of their total expenses that an increasing volume of sales suffices to keep their profits rising for some time after prime costs have begun to advance. But there is a limit upon the number of patrons they can serve with their existing plants, and as this limit is approached a further advance in the cost of materials, labor, etc., is bound to reduce their profits. MITCHELL: BUSINESS CYCLES 497 State and federal legislation has recently brought most of the American railways into the class of enterprises whose charges are subject to public super- vision. And experience has shown that public commissions are much less ready to permit than railway managers are to propose advances in freight and pas- senger rates. For a public commission is prone to consider, not whether costs are encroaching upon profits, but whether current profits constitute a fair return upon the capital invested. This attitude may be wholly justifiable upon broad grounds of public policy ; but the continuation of business prosperity may be imperilled by allowing costs to encroach upon profits, even though the rate which remains to the companies would have seemed amply remunerative in the earlier days of revival.*" As examples of enterprises which hesitate to raise prices because they sell to a wide circle of individual consumers at prices stereotyped by business policy or by custom, we may cite the newspapers, the weekly and monthly periodicals, and the manufacturers of trade-marked goods which are advertised widely at fixed prices. The first group, however, may raise its advertising rates, and perhaps the second may reduce the quality of its wares. Early in every period of prosperity many other enterprises sign contracts which bind them to deliver at fixed prices goods which conform to strict speci- fications. When these contracts make up the bulk of their business, and require many months to execute, the selling firms are nearly helpless if their profits are threatened by rising costs. All enterprises which have difficulty in protecting profits by raising prices have peculiarly strong motives for resisting the advance in the cost of materials, labor, etc. But, in so far as they are buying staples or supplies made from staples which are used by many other industries, they must get their shares in competition with enterprises which are free to raise selling prices. The gas companj^ must bid for coal against the neighboring foundry, the newspaper must pay enough for paper to keep a portion of the logs cut from going to the planing mills, etc. And neither the gas company nor the newspaper can prevent its employes from slackening the intensity of their effort. Inability to raise selling prices certainly does not confer immunity against the rise of buying prices. B. THE INCREASE OF CAPACITY FOR PRODUCING GOODS The obvious point has already been made that when new industrial equip- ment is placed in active service both the demand for labor, materials, etc., and the current supply of products are enlarged. Hence the encroachments of costs and the difficulty of advancing selling prices are both aggravated." The *s How a decline of prospective_ profits puts a close to prosperity is explained in the closing section of this chapter. *'' See section ii, 1, of the present chapter. 498 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA resulting strain grows progressively more severe so long as prosperity continues to stimulate investment in new equipment. Must not the day come when, in all the industries affected, selling prices can no longer be raised ? It is conceivable that under a supremely systematic and far-sighted direction of economic activity the rate at which new industrial equipment was provided in every branch of industry might be adjusted to the rate at which the demand for its products increased with such nicety as to prevent the overstocking of any market. Needless to say, such system and such foresight are not attained by the present business community. The provision of new equipment for busi- ness use is left to the initiative of any individual who will risk his own funds or who can persuade investors to risk theirs in the venture. Caution is enforced by the penalty of pecuniary loss if the enterprise does not find a profitable market for its wares. But a year or more is usually required to carry such a project from the stage of inception to the stage when an elaborate plant stands ready to begin operations. With the crude criteria available at present, no one can make accurate forecasts of the prices at which given quantities of a commodity can be sold so long in advance. The result is that many of the forecasts which are made go wrong. The provision of industrial equipment proves inadequate to meet the demand which exists at profitable prices in some branches of trade, and more than adequate in other branches. The whole tenor of prosperity, however, is in the direction of augmenting errors of the latter kind. The optimistic temper which prevails disposes most men to under-rate the risks and to over-rate the probable gains. Even the active and experienced men of affairs do not escape this infection of over-confidence, and the mass of investors are especially subject to it. Indeed, the credulity of the latter class offers a tempting opportunity to enterprising promoters, who launch plausible schemes, sell them out to the general public, and abandon them to their fate.** The twist given by over-confidence to forecasts of future demand, always difficult to make with accuracy, thus leads in every period of prosperity to an overstocking of certain markets. To check the prosperity out of which the movement grows it is not necessary that investments should return no profits or involve heavy losses. Difficulty arises whenever the increase in the capacity of certain kinds of mines or factories, or of the sa-\vmills, railways, etc., in certain districts, proceeds fast enough to keep selling prices from rising as rapidly as costs. For a decline of orders from the industries first affected spreads trouble among other branches of business by a process analagous to that by which activity is propagated.*" And, what is more serious still, an actual or even a prospective decline of profits in a few important industries suffices to create financial difficulties of grave concern to all industries."" *8 See Chapter II, iv, 2 and 3. 40 See Chapter X, ii, 1 and 2. 50 See section v, 3, below. MITCHELL: BUSINESS CYCLES 499 C. THE ADVANCE IN INTEREST BATES Rising rates of interest of course count among the increasing costs of doing business which threaten to reduce profits. But they also have other effects which must be counted among the obstacles which prevent selling prices from being raised sufficiently to cancel increasing costs. It has already been shown that the discouragement of long-term borrowing, caused by the rise of interest rates, makes it difficult for the trades engaged in construction work of all kinds to secure new contracts.^^ Investors will not pay these high rates. Neither will they let contracts freely at the high prices which contracting firms are forced to charge in order to meet their own high costs. And when contractors of various kinds begin to restrict their orders for materials and supplies, the decline of demand threatens to stop the rise of prices in other industries, if not to cause a fall. In the money market there is little evidence that the demand for short-time loans falls off when interest rates mount high ; but it is clear that banks restrict their loans when the ratio of reserves falls dangerously low.^^ Of course, inability to borrow means inability to buy — a check upon the expansion in the demand for a vast variety of goods and hence an added obstacle in the way of further price advances. High discount rates also impede the efforts, often made toward the end of a prosperous period, to maintain selling prices by keeping goods off the market and allowing the current output to pile up in huge stocks, which are held for sale at a more opportune moment. This policy interrupts the inflow of cash from sales, and makes it necessary to borrow money to pay running expenses. A temporary relief from a threatened fall of prices may be obtained in this way, but the potential danger becomes more grave. The heavy interest cost of "carrying" the unsold stocks saps the financial strength of even the largest enterprises and makes long persistence in this course hazardous. If buyers get wind of the situation, they hold off' for the drop in prices which they expect to come when the stocks are finally ' ' sacrified. ' ' In short, there can be but one end to such a policy when initiated under the business conditions of waning prosperity, and that disastrous end is hastened by high discount rates. D. XJNDEE-CONSUMPTION If certain of the theories reviewed in the first chapter are sound, the greatest obstacle in the way of defending profits by advancing selling prices is the lagging of consumers' demand behind the supply of consumers' goods. May goes so far as to say that a glutting of the markets can be prevented only by combining an increase in wages with a decrease in prices — only by such double 51 See section ii, 4, of the present chapter. 52 See section iii, 3, of the present chapter, 500 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA stimulation can demand be kept up to supply. Af talion holds simply that the increasing supplies of consumers' goods cause marginal utilities to fall, and thus bring on a decline in the price level.°* Such theories are speculative solutions of a quantitative problem, which is commonly formulated in the question. Does the increase in consumers' demand keep pace with the increase in consumers' supply? but which is more accurately stated by asking, Does consumers' demand grow fast enough to absorb the forthcoming supplies at the continually rising prices which must be charged to prevent costs from encroaching upon profits? To answer this question categorically would require more refined and more extensive statistics of demand, supply, and prices than are to be had." One 53 See Chapter I, ii, 3 and 5. 5i Some light is shed upon the theory of underconsumption by figures which deal with the purchasing power of wage-earners ' incomes. The federal Bureau of Labor has computed the average changes in the purchasing power of factory hands by combining its index numbers of wages per hour, hours per week, and retail prices of food. The results, reproduced below, indicate a slight decline between the early and the late stages of prosperity in the amount of food a wage-earner can buy. Thus the statistics seem to bear out the contention that consumers' demand does not expand rapidly. But several factors of moment have been omitted from the computation. (1) The number of employes in the establishments investigated by the bureau increases rapidly during prosperity. To show the effect of this factor upon market demand for food, a final column has been added to the table as published by the bureau. It is made by multiplying the relative purchasing power of full-time weekly earnings by the relative number of employes. A rapid expansion of purchasing power appears in the results, though the rate of growth becomes somewhat slower as the climax of prosperity is approached. (2) The in- crease of money incomes arising both from the greater steadiness of employment and the greater frequency of "overtime" in active periods is unrepresented. (3) The proportion of money income which is spent upon consumers' goods may change. If extravagance does become as widespread as popular moralists assert, the rate of savings may shrink somewhat in comparison with the early days of prosperity — shrink to the detriment of would-be borrowers, but to the advantage of purveyors of consumers' goods. Eblativb Number of Employes, Hours Per Week, Wages Per Hour, Pull Time Weekly Earnings Per Employe, Retail Prices of Food, and Purchasing Power of Hourly Wages and of Pull Time * Weekly Earnings Per Employe, Measured by Retail Prices of Food, 1890-1907 (Relative Numbers computed on basis of averages for 1890-99 = 100) Purchasing power measured by retail prices of food of Year Number of employes Hours per week Wages per hour Full time weekly earnings per employe Retail prices of food, weighted according to family consumption Hourly wages A Full time weekly earnings per employe Weekly earnings multiplied by number of employes 1890 94.8 100.7 100.3 101.0 102.4 97.9 98.6 93.5 1891 97.3 100.5 100.3 100.8 103.8 96.6 97.1 94.5 1892 99.2 100.5 100.8 101.3 101.9 98.9 99.4 98.6 1893 99.4 100.3 100.9 101.2 104.4 96.6 96.9 96.3 1894 94.1 99.8 97.9 97.7 99.7 98.2 98.0 92.2 1895 96.4 100.1 98.3 98.4 97.8 100.5 100.6 97.0 1896 98.6 99.8 99.7 99.5 95.5 104.4 104.2 102.8 1897 100.9 99.6 99.6 99.2 96.3 103.4 103.0 103.9 1898 106.4 99.7 100.2 99.9 98.7 101.5 101.2 107.7 1899 112.1 99.2 102.0 101.2 99.5 102.5 101.7 114.0 1900 115.6 98.7 105.5 104.1 101.1 104.4 103.0 119.1 1901 119.1 98.1 108.0 105.9 105.2 102.7 100.7 119.9 1902 123.6 97.3 112.2 109.2 110.9 101.2 98.5 121.7 1903 126.5 96.6 116.3 112.3 110.3 105.4 101.8 128.8 1904 125.7 95.9 117.0 112.2 111.7 104.7 100.4 126.2 1905 133.6 95.9 118.9 114.0 112.4 105.8 101.4 135.5 1906 142.9 95.4 124.2 118.5 115.7 107.3 102.4 146.3 1907 144.4 95.0 128.8 122.4 120.6 106.8 101.5 146.6 Mr. George H. Wood's British figures ("Real Wages and the Standard of Comfort Since 1850," Journal of the Royal Statistical Society, March, 1909, vol. 72, p. 103) seek to cover some of these omitted items. His series for retail prices include other articles than food. He has estimated the variations in working-class rents, and combined the data for unemployment with the data for wages. Further, Mr. Wood points out that MITCHELL: BUSINESS CYCLES 501 significant fact, however, is established in Chapter IV. The monthly figures of Table 4 show that producers' goods reached their highest point and began their decline earlier in 1907 than did consumers' goods. Likewise, the monthly in England there has been a steady shifting away from the ill-paid toward the well-paid occupations. Hence the "average workman" has improved his position more rapidly than the "workman of unchanged grade." The final results of his investigation, converted from English into American money and shifted from the basis actual amounts in 1850^=100 to the basis average actual amounts in 1890-99^100, are summed up in the The Estimated Changes in the Real Wages op English Workmen By Years, 1890-1902 Relative figures for workmen o£ unchanged grade Money cost of Money wages Relative ^ A \ ^ assuming 20s in 1850 real wages Money wages Relative Kelative Percent- Commod- Rent commod- ' Allowing Full work Allowing ' Allowing money retail age unem- ities 1850 1880 — ities 1850 I'ull for unem- 1890-99 for unem- Full for unem- Real Year wages prices ployed = 16s 4s = 20« work ployment ^ 100 ployment work ployment wages 1890 99 104 2.1% $3.55 $1.22 $4.77 $7.91 $7.74 97 99 100 103 98 1891 99 105 3.5 3.58 1.24 4.82 7.91 7.64 96 97 100 101 97 1892 99 105 6.3 3.58 1.24 4.82 7.86 7.37 95 94 100 98 96 1893 99 101 7.5 3.46 1.24 4.70 8.10 7.28 98 95 99 96 98 1894 99 99 6.9 3.38 1.24 4.62 7.86 7.32 99 97 99 97 100 1895 99 96 5.8 3.26 1.27 4.53 7.86 7.40 102 100 98 96 100 1896 99 95- 3.4 3.24 1.27 4.50 7.91 7.64 103 104 99 100 102 1897 101 98 3.5 3.33 1.27 4.60 8.08 7.79 103 103 100 101 102 1898 102 99 3.0 3.41 1.27 4.67 8.13 7.88 102 103 102 103 102 1899 105 98 2.4 3.33 1.29 4.62 8.35 8.15 105 108 104 106 104 1900 109 101 2.9 3.46 1.29 4.75 8.69 8.42 107 108 108 109 106 1901 109 103 3.8 3.50 1.29 4.79 8.69 8.35 106 106 107 108 104 1902 107 104 4.4 3.55 1.29 4.84 8.57 8.18 104 103 105 106 102 accompanying table. They show a definite increase in the purchasing power of money wages up to the very end of the prosperous period 1896-1900. If these figures could be multiplied by the relative number of employees, the total purchasing power represented would doubtless increase much more rapidly. Mr. Walter T. Layton (Introduction to the Study of Prices, London, 1912, p. 150) has extended to 1910 Mr. Wood's relative figures for money wages, retail prices, unemployment, and real wages of men in full work, and allowing for unemployment. The last-mentioned series, shifted to the basis 1890-99^100, runs as follows: Relative Real Wages in England, Allowing for Unemployment 1890 99 1901 107 1891 97 1902 104 1892 94 1903 100 1893 95 1904 _ 98 1894 . .. 97 1905 1906 100 1895 100 103 1896 104 1907 104 1897 104 1908 97 1898 103 1909 96 1899 108 1910 98 1900 109 These figures, like the others, indicate a gain in the purchasing power of wage-earners' incomes up to the years of the crises — even without counting the gain in the number of persons at work. The rate of gain, however, slows down in the crisis years. It is noteworthy that real wages did not attain as high a level in 1907 as in 1899-1900. Interesting as are these estimates, they leave much to be desired. Even if the figures be accepted at their face value, they show merely that, despite the rise of retail prices, one large class of people is able to buy an increasing volume oi consumers' goods in periods of prosperity. How matters stand with other classes remains conjectural. The incomes of bondholders must increase rather slowly; indeed, they do not increase at all except so far as these persons have fresh savings to invest at the high rates which become prevalent in prosperity, or venture to shift their funds to securities which yield higher returns. If the tables of Chapter IX and the analysis of Chapter X may be trusted, stockholders and other recipients of profits enjoy a more rapid increase of money income than wage-earners. It may also be said with some assurance that the incomes of the landlord and salaried classes grow more slowly on the average than do wages. But concerning the non-salaried professional men, concerning farmers, and concerning wage-earners outside of manufacturing industries, there is no substantial basis for making even a guess at the average increase of money incomes. And, if the rates of increase were known, there would be no satisfactory data to confirm or disprove Hob- son's assertion that the proportion of income saved gains upon the proportion spent. Finally, if we did know at what average rate expenditure upon consumers' goods increases, we should still be unable to complete the demonstration; for we have no satisfactory statistics of the increase in the volume of consumers' goods pro- duced and sent to market. 502 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA figures of Tables 5 and 6 show that raw materials began to fall in price before the products manufactured from them. Now, if the chief stress arose from the lagging of consumers' demand behind the supply of consumers' goods, one would expect the opposite result to be registered by the index numbers. Con- sumers' goods would be the first to fall in price, and this decline would extend to the prices of producers' goods and of raw materials. This extension might take place promptly; but certainly these other classes of commodities would not be the first to fall. What is known about the behavior of prices, then, favors the view that the impossibility of defending profits against the encroachments of costs is experienced earlier by enterprises which handle raw materials and producers' goods. This conclusion is confirmed by a comparison between the current reports concerning retail trade, jobbing, and manufacturing at times when crises are approaching. The technical journals usually report that the factories and wholesale houses are restricting their orders some weeks, if not months, before they report that retail sales are flagging. Until the under-consumption theories have been shored up by more con- vincing evidence than has yet been adduced in their favor, therefore, the view must prevail that the difficulty of warding off encroachments upon profits by advancing costs comes to a head earlier in other lines of business than in those concerned with consumers' goods. The latter industries may well have troubles of their own, troubles which would presently become acute if left to themselves. But these gradually accumulating difficulties usually cut but a small figure, because before they have reached a critical stage they are over- shadowed by graver troubles arising in other quarters. 3. Tfm Critical Point To sum up : The very conditions which make business profitable gradually evolve conditions which threaten a reduction of profits. When the increase in the volume of business, at first a cause and later both a cause and a consequence of rising profits, taxes the productive capacity of the existing industrial equip- ment, the early decline of supplementary costs per unit of output comes gradually to a standstill. Meanwhile, the expectation of making satisfactory profits induces active bidding among business enterprises for materials, labor, and loan funds, and sends up their prices. At the same time, the poorer parts of the industrial equipment are brought back into use, the efficiency of labor declines, and the incidental wastes of management rise. Thus the prime costs of doing business become heavier. After these processes have been running cumulatively for a time, it becomes difficult to advance selling prices fast enough to avoid a reduction of profits by the encroachment of costs. In many industries the increase in industrial equipment has been so rapid that the full output can scarcely be marketed at the high prices which must be asked. In the trades MITCHELL: BUSINESS CYCLES 503 engaged in construction work the volume of new contracts declines when the rise in long-term interest discourages borrowing, and when the cost of construc- tion becomes excessive in the eyes of investors. The decline in bank reserves ultimately makes the banks disinclined to expand loans further — a development which diminishes the ability oi many enterprises to buy as freely as they had planned. The high discount rates also clog the effort to forestall a decline of prices by holding stocks of commodities off the market. In other trades prices are more or less stereotyped by public regulation, custom, contract, or business policy. It may also be that the purveyors of consumers' goods in general find difficulty in selling their supplies at sufficiently high rates to maintain profits unimpaired, though index numbers and market reports indicate that these difficulties come to a head earlier in other branches of trade. Since these various stresses become more severe the longer prosperity lasts and the more intense it becomes, and since a set-back suffered by any industry necessarily aggravates the stress among others by reducing the market for their products, a reduction in the rate of profits must infallibly occur. But both the analysis and the statistics of profits in Chapter IX show that this reduction comes much later in some branches of business than in others, and varies widely in its severity. Even in the same industry different enterprises have exceedingly dissimilar fortunes, partly because of unlike advantages of location and business connection, partly because each enterprise encounters its own peculiar set of unforeseen business conjunctures, partly because of unequal energy and skill among the managers. Indeed, what quantitative information we possess indi- cates that in the very last year preceding a crisis a large number, perhaps a majority, of enterprises are still making profits as high as or higher than in any preceding year. That is, if an average rate of profits could be computed for a whole country, it would not be surprising to find it reaching its climax just before the crisis breaks out. But this result would not mean that there had been no serious encroachment upon profits. On the contrary, it would mean that the critical point is reached and a crisis precipitated as soon as a decline of present or prospective profits has occurred in a few leading branches of business and iefore that decline has become general. To understand this devel- opment, it is necessary to examine the bearings of the rate of prospective profits upon outstanding credits. V- The Undermining of Business Credit 1. The Relations bet-ween Credit and Profits Towards the end of a period of expansion practically all business enterprises have become enmeshed in the network of credit. Customers prefer to buy "on time," and in their turn sellers insist upon receiving similar terms from those from whom they buy. There are outstanding numberless contracts which require 504 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA work to be done by one enterprise for another in advance of payment. And nearly all enterprises above the smallest size borrow from the banks. This seeking for credit, indeed, is not purely voluntary. Where the increase in the volume of business made possible by the use of borrowed funds adds more to profits than the interest adds to costs, borrowing becomes compulsory in sharply competitive trades. For a man who uses borrowed funds in addition to his own capital can make higher profits than a rival who refuses to ' ' run into debt, ' ' if both sell at the same price. Then the borrowing competitor, if he be aggressive, can undersell his less daring rival and still make a fair rate of profit while driving the latter out of business. Thus even the reluctant among business men are constrained to ask as well as to grant credit.^^ In order to bring out the relation between these credits and profits it is necessary to recite a few familiar facts of business practice. The amount of credit which an enterprise can secure depends primarily upon the estimate set by lenders upon its value as a going concern. Several elements are commonly taken into consideration in framing such estimates: the amount, nature, and condition of the physical property owned by the enterprise, including stocks of materials and finished goods as well as real estate and equipment ; the number and character of the contracts, patent rights, franchises, securities, etc., w^ich it holds; its pecuniary obligations already outstanding; the balance between its bills due and bills receivable; the good- will it enjoys; the business prospects of the branch of trade in which it is engaged, etc. Now all of the property owned by a business enterprise, both tangible and intangible, is valued primarily upon the basis of the amount of money which can be made by its use. Good-will, also, is valued according to its estimated contribution toward profits. Pecuniary obligations of all sorts have to be considered because they represent deductions which must be made from gross receipts before net profits can be computed. And business prospects mean precisely the prospects of making money. That is, profits, present and prospective, are by far the most important single element in deciding how much a business enterprise is worth and how large a line of credit can safely be granted it. Indeed, if the available data concerning present and prospective profits were. sufficiently full and sufficiently trustworthy to be accepted without being checked by any other methods of estimate, a business euterpi'ise might be rated simply by capitalizing these profits at the current rate of interest."" 5^5 Compare Thorstein Veblen, Theory of Business Enterprise, pp. 92-97. •■•o Additional elements are taken into consideration when an enterprise oilers the lender of credit some guarantee in support of its promise to pay. If the security consists of endorsements by other business enter- prises, or 01 promissory notes, bills of exchange, etc., owned by the applicant, then the lender estimates the financial standing of the other enterprises on the basis just described. If the security is stocks offered as collateral, their pecuniary value is estimated, and again the factor of chief importance is the present and prospective profits of the business enterprise concerned. If the security be bonds, it is still necessary to know what profits the issuing corporation makes in order to determine the chances that the interest will be paid promptly. In ease the security consists of warehouse receipts, bills of lading, bills of exchange, or similar documents which carry with them the legal title to certain commodities, the prices which the latter will com- mand become the matter of prime importance. But even then the business standing of the applicant for credit is taken into account, since lenders do not want the trouble, delay, and uncertainty involved in having to sell the commodities to secure reimbursement. AIITCHELL: BUSINESS CYCLES 505 Whatever form credit assumes, in fine, whether it be a bank loan, mercantile credit, or a contract requiring the performance of services for future payment, whether it be supported by collateral security or not, the present and prospective profits of the applicant form an element, usually the crucial element, in deter- mining how much may be granted. 2. The Effect of Prosperity upon the Volume of Credits In its earlier stages, prosperity increases the volume of credits which prudent judges are willing to concede by broadening the basis upon which credits are granted. All who deal in staple commodities by methods which enable them to pledge their stocks to lenders, can secure increasing advances as the prices of their goods rise. The concomitant advance of stock-exchange securities per- forms a like service for those with shares and bonds to.offer as collateral. And the increasing profits of business enterpi'ises, coupled with their brighter pros- pects in the immedi-ate future, justifies them not only in their own opinion, but also in the opinion of lenders, in asking for more liberal lines of credit. The effect of these definite changes in the business situation is heightened by the prevailing spirit of confidence. On the same facts submitted by an applicant for discounts bankers will pass a more favorable verdict; the credit men of wholesale houses have less critical eyes for the orders sent in by retail dealers ; and manufacturers are more easily induced to make up goods to be paid for after delivery. As prosperity grows more intense, a pryamiding of credits begins. The larger advances secured in one form or another by most business houses help to swell their profits. In turn, the higher profits, present and prospective, give these enterprises both a business motive and a business justification for demand- ing larger credits. If their applications are granted and followed by further increases of profit, the enterprises make still larger demands, and so on. At the same time, the high rate of profits disposes business men to use their own funds to control as many enterprises as possible ; that is, to finance their ventures with borrowed money to the extreme limit permitted by lenders.'" Similarly with the other bases of credit. Prosperity leads to a rapid advance in the prices of commodities ; then higher prices force the dealers to secure more funds to finance their purchases, and, on the other hand, enable them to borrow more money on their warehouse receipts, etc. So, too, with stock-exchange securities, when used as collateral for loans. Every rise of the quotations entitles holders to ask for larger advances, and if these advances are invested in further purchases on the exchange they aid in screwing up quotations, and the higher quotations increase the borrowing power of the owners once more. uT Compare section iii, 1, above. 506 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA This process does not run long without encountering obstacles. The advance in interest rates is one, because it cuts down the capitalized value of given pros- pective profits. The fall of bond prices, which usually conies after a year or two of prosperity is another, because it reduces the borrowing power of men having this class of collateral. Stock prices are subject to frequent relapses, even in the best of times. The like is true of commodity prices, particularly in the case of the great agricultural staples. And the credit based on the business rating of enterprises has its ups and downs; for the prospective profits of different enterprises vary endlessly, bankruptcies occur in every year to incul- cate caution among lenders, and every year has its seasons of relative dullness and doubt. But, despite these minor checks, the grand total of credits rises year by year until the climax of prosperity has been reached.'* Accordingly, that climax finds business enterprises trusting each other liber- ally for the payment of goods sold upon time, contracting freely to make goods for future delivery, and also borrowing on the grand scale permitted by high profits and easy optimism. At this stage of the cycle the typical business enter- prise has outstanding heavy financial obligations to creditors, but relies con- fidently on the still larger sums which will fall due from its debtors, plus the sums represented by its unsold goods and unfilled contracts, to bring in the necessary funds in good season. 3. The Effect Upon Outstanding Credits of the Decline in Prospective Profits Upon such a structure of inter-locking credits, the encroachments of costs upon profits combine with the tension in the money and investment markets to impose an ever-increasing strain. The course of development can be followed most clearly with reference to credits granted upon stock-exchange collateral in New York during the period which bred the panic of 1907. The following figures show the lowest and the highest points touched between January, 1904, and September, 1907, by interest rates, and commodity and security prices, together with the level at which all these factors stood in the last-named month — just before the panic began."^" Bond prices began to rise before the depression of 1903-04 was over. Two or three months later stock prices moved upward, and, after another two or three months, commodity prices. Discount rates did not advance until eight or nine months after commodities, and two months more passed before investment rates of interest turned the corner. The early advance of securities, the slightly later advance of commodities, and the continued decline of interest rates, all helped to broaden the basis of credit. 58 Compare the rapid increase of bank loans shown by the tables of Chapter VII. 69 The commodity prices are from the Bulletin of the Bureau of Labor, March, 1910, p. 398. The other data are all compiled from the monthly tables of Chapter IV, iii and iv. MITCHELL: BUSINESS CYCLES 507 Substantially the reverse order was observed on the fall. Bonds and pre- ferred stocks touched their highest points in August, 1905, common stocks in January, 1906, and raw materials in June, 1907, while manufactured goods and TABLE 130 The Extreme Fluctuations op Interest Rates and op Commodity and Security BETWEEN January, 1904, and September, 1907 Interest rates Highest point in Jan. 1904-Sept. 1907 4.27%, Sept., 1907 6.79%, Sept., 1907 Commodity prices 136.9, June, 1907 130.3 Sept., 1907 Security prices 118.6, Aug., 1905 188.5, Aug., 1905 311.5, Jan., 1906 279.5, Jan., 1906 Lowest point in Jan. 1904-Sept. 1907 Average yields upon investments in ten railway bonds 3.80%, Aug., 1905 Discount upon 60-90 day com- mercial paper 3.75%, June, 1905 Eaw materials 117.3, Oct., 1904 Manufactured goods 110.3, Sept., 1904 Ten railway bonds 113.1, Meh., 1904 Ten preferred stocks 143.5, June, 1904 Ten common stocks 183.5, June, 1904 Forty common stocks 165.5, May, 1904 Prices in New York, Standing just before the panic 4.27%, Sept., 1907 6.79%, Sept., 1907 132.8, Sept., 1907 130.3, Sept., 1907 105.6, Sept., 1907 123.0, Sept., 1907 205.0, Sept., 1907 197.0, Sept., 1907 interest rates on both long and short loans continued to advance until the panic broke out. Of course, the fall in security prices was partly a consequence of the rise in interest rates; for a bond or stock expected to bring in interest or dividends at a specified rate is worth less on an investment basis when "money" brings 6 per cent than when it can be had for 4 per cent."" But, whatever the cause to which it was due, the fall in the prices of securities began to undermine the credit of borrowers who depended upon this type of collateral considerably more than a year before the panic occurred. The strain began earlier in the case of bonds, but it became much more severe in the case of stocks — especially of common stocks. Borrowers whose credit depended upon the prices of raw materials which they could use directly or indirectly as collateral, did not suffer in the same way until the summer before the panic, and then the decline in the prices of their wares was much more moderate than the decline in stock prices. Finally, those who could make a similar use of manufactured goods had a nominally increasing security to offer until the panic actually began. Now, the money value of an enterprise as a going concern and the price of shares in business enterprises are matters of the same sort. No doubt, the list- ing of shares on a stock-exchange gives opportunity for the occurrence of many fluctuations in prices which find no parallel in a banker's rating of the business 60 Indeed, the relative prices of bonds can be computed only on the basis of their net yields. See Chapter IV, iv, 6. 508 MEMOIRS OP THE UNIVERSITY OP CALIFORNIA enterprises which apply for loans." But, if the enterprise has difficulty in financing its plans for permanent improvements, the banker is less disposed to take its paper. A mere rise in interest rates will tend to depress its capitalized value in the banker's eyes, in the same way that a tight money market tends to depress the prices of stocks. Most of all, the moment that prospective profits decline, even though present profits continue large, the banker revises his estim- ate of how much credit the enterprise may reasonably be granted. In short, the business factors which cause stocks to fall in the later stages of prosperity have a similar effect upon the credit ratings of business enterprises. The latter fact is less clear solely because these ratings are not made upon an open market, and not quoted in the newspapers. Accepting the prices of shares in business enterprises, then, as the best available index of the current valuations set by men of affairs upon going concerns, we may enquire how general and how severe was the decline in market ratings before the panic of 1907. The Financial Review gives stock quotations for 63 manufacturing, mining, gas, electric, street railway, and miscellaneous companies on January, 1906, January, 1907, and September, 1907. Adding our 40 transportation companies, we have a list of over one hundred business enterprises for which the changes in current valuation during the period which bred the crisis are recorded. Between January, 1906, and January, 1907 — the culminating year of prosperity — shares in 21 of these companies rose in price, while in 82 companies shares fell. That is, nine months before the panic broke out a reduction of market valuation had occurred in the case of four out of five of these enterprises. But the average decline was rather moderate as stock-market fiuctuations go — 9 per cent of the prices in January, 1906. As the stresses bred by prosperity became more intense this decline grew greater in degree and became all but universal. Only one enterprise — the American Cotton Oil Company — saw its shares rise between January and September, 1907, while 102 enterprises saw their shares fall. The average drop in these eight months was 28 per cent."^ While we cannot prove by direct evidence that this decline in the values set by the stock market on shares in large corporations fairly represented the 31 Compare Chapter IV, iv, 1. "2 Among the seven industrial groups into which the 103 companies fall, two show a slight average rise between January, 1906, and January, 1907 — the mining and smelting companies, and the great iron and steel companies which mine much of their own coal and ore. On the other hand, these two groups' suffered a heavier average fall in market valuation between January and September, 1907, than did any of the five other groups. These facts accord, well with the preceding analysis. The rapid rise in the prices of raw mineral products during a period of prosperity enables the mining company to offset the encroachments of costs upon profits until the falling off in new contracts for construction work begins. But when the cycle has reached that point these same companies experience a peculiarly violent constriction in demand, and their prospective profits drop suddenly. Among the remaining groups, which differ widely from each other in character of products, the fall of stock prices from January, 1906, to .January, 1907, and again from the latter date tb September, 1907, presents surprisingly uniform averages. The data upon which these generalizations rest are given in the following table. The actual prices are means between the highest and lowest quotations reported by the Financial Eevietr. MITCHELL: BUSINESS CYCLES 509 change in the values set by credit men upon smaller business enterprises, still we can scarcely doubt that lenders of all classes were growing more and more conservative in their ratings of applicants for loans. Of course this change in mental attitude was no mere whim or emotional aberration, but the mature Prices of Common Shares in 103 Business Enterprises in January, 1906, January, 1907, and September, 1907- Mean actual prices Mean relative prices Actual prices in Jan., 1906 = 100 Jan., 1906 Milling and Smelting — Amalgamated Copper Co $109.69 American Smelting and Eefining t'o 167.75 Columbus and Hocking Coal and Iron Co 22.06 Federal Mining and Smelting Co 168.50 Homestake Mining Co 81.50 National Lead Co 87.69 Ontario Silver Mining Co 3.44 Pittsburg Coal Co. of New Jersey 16.06 IT. S. Eeductio.n and Befining Co 32.00 Average, 9 enterprises Iron and Steel — Colorado Fuel and Iron Co 69.38 Eepublio Iron and Steel Co 35.50 Sloss-Sheffield Steel and Iron Co 91.50 Tennessee Coal and Iron Co 147.00 U. S. Steel Corporation 44.13 Virginia Iron, Coal, and Coke Co 26.57 Average, 6 enterprises Machinery and Sailway Equipment — Allis Chalmers Co - 24.69 American Car and Foundry Co 43.50 American Locomotive Co _ 74.62 American Steel Foundries 14.44 General Electric Co 176.63 International Power Co 76.50 International Steam Pump Co 32.50 New York Air Brake Co 159.25 Pressed Steel Car Co 59.06 Railway Steel Spring Co 60.75 U. 8. Cast Iron Pipe and Foundry Co 49.56 Westinghouse Electric Manufacturing Co 171.00 Average, 12 enterprises Manufacturing, various — American Agricultural Chemical Co 29.31 American Beet Sugar Co 30.50 American Cotton Oil Co 40.63 American Grass Twine Co 10.75 American Hide and Leather Co 9.31 American lee Securities Co 40.88 American Linseed Co 24.63 American Sugar Eefining Co. 150.69 American Woolen Co 44.31 Butterick Co 57.44 Centra] Leather Co 47.06 Distillers Securities Corporation 52.56 General Chemical Co 79.50 International Paper Co 24.18 Knickerbocker lee Co. (Chicago) 64.88 National Biscuit Co 69.00 Jjational Enameling and Stamping Co 17.25 U. S. Rubber Co 54.75 Union Bag and Paper Co 14.31 Virginia Carolina Chemical Co 51.00 Average, 20 enterprises * February, 1907. t August, 1907. Jan., 1907 $116.13 148.31 26.06 161.50 85.00* 71.13 6.56 16.13 28.88 52.19 37.44 73.63 158.00 46.56 43.50 15.19 43.19 72.38 9.75 159.13 49.38 37.63 137.25 52.00 54.25 47.38 151.38 24.19 21.50 30.88 7.38 5.88 86.50 17.63 132.81 33.63 49.06 36.38 72.25 75.13 16.88 54.75 81.63 14.25 50.13 7.56 35.94 Sept., 1907 $65.38 93.94 22.44 95.50 71.25 49.88 3.50 9.75 13.75 21.88 22.38 46.50 135.00t 29.75 26.25 Jan., Jan., 1906 1907 7.56 39.06 52.38 6.63 126.50 40.88 22.50 109.00 28.13 36.13 30.13 138.00 16.88 12.50 32.50 4.63 3.94 42.88 8.50 112.38 22.44 31.25 17.88 54.38 63.00* 14.00 50.75 73.50 10.94 30.25 5.38 19.75 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 106 88 118 96 104 81 191 100 90 108 75 105 80 107 106 164 106 62 99 97 68 90 65 116 86 88 89 96 89 87 83 70 76 69 63 212 72 88 76 85 77 137 95 70 84 118 83 92 53 70 Sept., 1907 60 56 102 57 87 57 102 61 43 69 32 63 51 92 67 99 31 90 70 46 72 53 69 68 48 59 61 81 62 58 41 80 43 42 105 35 75 51 54 38 103 79 58 78 107 63 55 38 39 62 Rise ( + ) or fall ( — ) in relative prices between Jan., '06 Jan., '06 Jan., '07 Jan., '07 Sept., '07 Sept., '07 + 6 — 12 + 18 — 4 + 4 — 19 + 91 10 — 25 + 5 — 20 + 7 + 6 + 64 + 6 — 38 — 1 — 3 — 32 — 10 — 35 + 16 — 14 — 12 — 11 — 4 — 11 — 13 — 17 — 30 — 24 — 31 — 37 +112 — 28 — 12 — 24 — 15 — 23 + 37 — 5 — 80 — 16 + 18 — 17 — 8 — 47 — 30 — 11 — 40 — 44 + 2 — 43 — 13 — 43 + 3 — 39 — 57 — 31 — 68 — 37 — 49 — S — 33 — ] — 33 — 69 — 10 — 30 — 54 — 28 — 47 — 31 — 32 — 52 — 41 — 39 — 19 — 38 — 42 — 59 — 20 — 57 — 58 + 5 — 65 — 25 — 49 — 46 — 62 + 3 — 21 — 42 — 22 + 7 — 37 — 45 — 62 — 61 — 38 — 46 — 32 — 16 — 39 — 17 — 24 — 89 — 39 — 47 — 39 — 43 — 42 — 29 — 15 — 39 — 65 — 39 — 31 — 9 — 27 — 22 — 18 — 12 — 47 — 18 — 40 — 30 — 35 — 8 — 25 — 25 — 29 + 4 — 26 — 21 —107 — 37 — 13 — 25 — 31 — 39 — 34 — 16 — 12 — 6 — 11 — 20 — 37 — 15 — 31 — 27 510 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA conclusion of much thinking about the changes in business prospects which pros- perity itself was bringing about. When this growing conservatism in judging what a business enterprise was worth had reached a certain point it became an independent force reacting powerfully upon the situation which had bred it. Let the estimated money values set upon business enterprises decline seri- ously, then creditors become apprehensive lest their margins of security shrink to nothing. Certainly the overwhelming majority of enterprises are still solvent ; probably a very large proportion are still making high profits ; perhaps more than half are doing better than at any previous stage of the business cycle. Prices op Common Shares in 103 Business Enterprises in January, 1906, January, 1907, and September, 1907 — (Continued) Mean actual p Jan., Jan., 1906 1907 Public Utilities — $ $ American Telephone and Telegraph Co 141.44 130.50 Brooklyn Eapid Transit Co 89.69 77.75 Brooklyn Union Gas Co 171.50 110.50 Chicago Union Traction Co 11.38 5.31 Consolidated Gas Co 174.88 136.00 Detroit United Railways 97.06 79.56 Metropolitan Street Railways 123.50 105.50 N. Y. and N. J. Telephone Co 154.75 113.00 North American Co. (new stock) 102.50 85.00 Peoples Gas, Light, and Coke Co. (Chicago) .... 100.50 96.44 Third Avenue Railway Co 137.25 120.25 Toledo Railways and Light Co 34.13 28.50 Twin City Eapid Transit Co 119.63 105.31 Average, 13 enterprises Miscellaneous — Brunswick Dock and City Improvement Co 19.00 14.00 Pullman Co 244.88 175.56 U. S. Realty and Improvement Co 91.25 83.75 Average, 3 enterprises Average, 63 "industrial" enterprises Transportation Companies — New York, New Haven, and Hartford 200.94 186.63 ISew York, Ontario, and Western 54.25 45.44 New York Central 152.06 129.88 Pennsylvania 144.25 135.44 Erie 48.75 38.94 Central of New Jersey 226.75 215.00 Delaware and Hudson 223.63 217.75 Delaware, Lackawanna, and Western 465.75 495.00 Philadelphia and Reading 149.13 129.19 Cleveland, Cincinnati, Chicago, and St. Louis .... 107.44 90.00 Wheeling and Lake Erie 19.19 14.75 New York, Chicago, and St. Louis 69.50 60.75 Wabash 23.38 17.31 Pittsburg, Cincinnati, Chicago, and St. Louis .... 85.25 75.69 Canada Southern 69.94 64.63 Lake Erie and Western 41.44 27.75 Hlinois Central 178.00 165.00 Chicago, Milwaukee, and St. Paul 186.38 151.31 Chicago and Northwestern 230.00 192.38 Chicago, St. Paul, Minneapolis, and Omaha 194.00 165.00 Duluth, South Shore, and Atlantic 21.00 18.00 Iowa Central 1 32.19 26.44 Minneapolis and St. Louis 82.13 57.88 Wisconsin Central 30.50 24.19 Chesapeake and Ohio 58.56 52.50 Norfolk and Western 89.13 88.38 * Interpolated. tJuly, 1907. Mean relatiye prices Actual prices in Jan., 1906 = 100 Sept., 1907 $ 109.75t 45.81 102.31 3.00 101.63 63.00 40.81 lOd.OO 59.88 86.88 50.50 21.50 93.31 10.00 156.75 50.00 150.25 33.31 104.25 119.88 20.81 173.00 158.50 469.00 94.44 62.25 9.69 35.88 11.69 66.50 60.88 16.56* 138.00 120.19 145.50 127.00 9.50 15.94 39.63 15.13 33.69 70.88 Jan., 1906 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Jan., 1907 92 87 64 47 78 82 85 73 83 96 88 84 88 81 74 72 92 79 91 93 84 85 94 80 95 97 106 87 84 77 87 74 89 92 67 93 81 84 85 86 82 70 79 90 99 Sept., 1907 78 51 60 26 58 65 33 58 — 86 — 37 — 63 — 78 — 59 — 53 64 55 57 63 75 61 69 83 43 76 71 101 63 58 50 52 50 78 87 40 78 64 63 65 45 50 48 50 58 80 Rise ( + ) or fall ( — ) in relative prices between , ' ^ Jan., '06 Jan., '06 Jan., 07 Jan., '07 Sept., '07 Sept., '07 -I- 13 36 53 22 18 15 27 17 4 12 16 12 19 26 28 8 21 7 16 15 6 20 5 3 6 13 16 23 13 26 11 8 33 7 19 16 15 14 18 30 21 10 1 + 22 49 40 74 42 35 67 32 42 14 63 37 22 41 47 36 45 48 37 25 39 31 17 57 24 29 1 37 42 50 48 50 22 13 60 22 36 37 35 55 50 52 50 42 20 — 14 — 36 — 4 — 21 — 20 — 17 — 52 — 5 — 25 — 10 — 51 — 21 — 10 — 22 — 21 — 8 — 37 — 22 — 28 — 18 — 23 — 16 — 11 — 37 — 19 — 26 — 5 — 24 — 26 — 27 — 35 — 24 — 11 — 5 — 27 — 15 — 17 — 21 — 20 — 41 — 32 — 22 — 29 — 32 — 19 MITCHELL: BUSINESS CYCLES 511 But the creditors of those enterprises which have suffered most severely from the encroachments of costs, from the decline of new orders, or from some unfor- tunate conjuncture ; or may be the creditors who happen to be most nervous — certainly numerous creditors of some sort become sufficiently alarmed to refuse to renew maturing loans. Then their debtors must pay up. When prosperity has evolved such a condition of business, the process of liquidation, once begun, spreads rapidly and promptly brings into its sweep even the creditors who are least nervous and the debtors who are most pros- perous. For the efforts to raise money made by the men called upon for settlement presently increase the uneasiness of other creditors and create new difficulties for the enterprises whose prospects of profits have not been dimmed hitherto. The analysis of the process by which liquidation spreads over the whole field of business, however, belongs in the next chapter; for when the demand for reduction of outstanding credits becomes general the business cycle passes over from the phase of prosperity into the phase of crisis. Prices of Common Shares in 103 Business Enterprises in Januabt, 1906, January, 1907, and September, 1907 — (Concluded) Mean actual prices Jan., Jan., Sept., 1906 1907 1907 Louisville and Nashville 152.50 139.50 107.81 Missouri Pacific 103.13 89.38 69.44 Missouri, Kansas, and Texas 38.31 38.63 35.00 Texas and Pacific 36.06 34.19 27.38 Atchison, Topeka, and Santa Fe 92.94 103.31 86.88 Denver and Rio Grande 44.94 39.19 23.69 Southern Pacific 69.25 93.25 85.44 Union Pacific 154.25 175.94 129.69 Canadian Pacific 173.38 187.50 164.00 American Express Co 235.75 241.00 202.00 United States Express Co 131.25 113.50 89.47* Wells-Pargo Express Co 244.00 285.00 280.00* Pacific Mail Steamship Co 48.75 37.75 24.38 Western Union Telegraph Co 93.63 83.63 75.50 Average, 40 enterprises Grand average, 103 enterprises 100 91 66 — 9 — 34 — 25 * Interpolated. Mean relative prices Actual prices in Jan., 1906 = 100 Eise ( + ) or fall (— ) prices betwee in relative n Jan., 1906 Jan., 1907 Sept., 1907 Jan., '06 Jan., '07 Jan., '06 Sept., '07 Jan., '07 Sept., '07 100 91 71 — 9 — 29 — 20 100 87 67 — 13 — 33 — 20 100 101 91 + 1 — 9 — 10 100 95 76 — 5 — 24 — 19 100 111 93 + 11 — 7 — 18 100 87 53 — 13 — 47 — 34 100 135 123 + 35 -1- 23 — 12 100 114 84 + 14 — 16 — 30 100 108 95 -1- 8 — 5 — 13 100 102 86 + 2 — 14 — 16 100 86 68 — 14 — 32 — 18 100 117 115 + 17 + 15 — 2 100 77 50 — 23 — 50 — 27 100 89 81 — 11 — 19 — 8 100 91 70 — 9 — 30 — 21 CHAPTER XII CRISES I. The Beginning of Liquidation AVe have seen that the very conditions of business prosperity ultimately beget a downward revision of credits. For prosperity produces a vast expan- sion of credits based primarily upon the capitalization of large anticipated profits. When profit margins are threatened by the encroachments of costs, when these encroachments cannot be offset by further advances of selling prices, and when the rate at which profits are capitalized is reduced by the rise of interest, then creditors begin to take alarm and press for the settlement of their claims. The beginning of this process of liquidation is sometimes prematurely brought on by the collapse of some conspicuous enterprise which has suffered heavy losses in speculative ventures. Such failures, however, are more often signs that liquidation is already under way than causes of its beginning. At other times crop failures, political disorders, uncertainties about the monetary standard, the outbreak of war or a drop of prices following upon the making of peace, crises in foreign countries, or other developments which do not arise from the domestic business situation give the impetus to liquidation before the period of prosperity has run its full course. But the preceding description of the processes going forward in a period of business activity shows that, even in the absence of any disquieting event from the outside, prosperity itself grad- ually accumulates stresses which impel creditors to demand repayment of a part of their advances. There is no general rule concerning the spot in the business system at which this process of forcing debtors to pay up begins. If there occur violent fluctu- ations in the prices of certain important materials which threaten losses to manufacturers or merchants, the trades concerned may be the first to suffer loss of credit. Contractors or others engaged in providing industrial equip- ment are especially likely to be early victims, because their orders fall off as soon as the bond market becomes stringent and the cost of construction becomes heavy. Or there may be some district of the country, rather than some line of business, where the great lenders of the financial centers think that the expansion of credits has proceeded faster than the expansion of security for [512] MITCHELL: BUSINESS CYCLES 513 repayment. Or it may be merely that certain individual creditors take the conservative tack before others, and put the screws upon whatever enterprises happen to have borrowed from them. The spot where liquidation begins, how- ever, is less important than the manner in which it spreads from enterprise to enterprise, from trade to trade, and from town to town. Say, then, that some creditor more cautious than his fellows, or the creditor of some enterprise more heavily involved than most, gives notice that a maturing debt will not be renewed or extended. The debtor has various ways of raising funds. He may apply to some other lender, he may put pressure upon those who owe him money, he may offer liberal inducements to settle accounts not yet due, he may persuade other creditors to allow more time on sums due them, he may force cash sales of wares on hand, he may "sacrifice" his securities or other property. If any of these shifts prove successful in securing the neces- sary funds, the debtor escapes bankruptcy himself. But his efforts increase the business difficulties of others. If he borrows from some bank, that insti-i tution is brought nearer the point where it must restrict its loans to other would- be borrowers. If he applies pressure to his own debtors he lands them in the same predicament he is facing. If he persuades other debtors to pay before their time or other creditors to defer their claims, he at least diminishes the means at their disposal. Finally, if he sells commodities, securities, or other property at a sacrifice for cash he injures the market for others. Thus, though the earlier attempts to force a liquidation of outstanding credits may cause no failures, they increase the likelihood that further attempts wUl have more serious results. They also increase the likelihood that similar attempts will be made by other creditors. Both creditor and debtor have an interest in concealing such matters as the refusal to extend a loan; but the steps which the debtor takes to raise money give an inkling of his plight to the business men whom he approaches on the subject. A suspicion that some creditor is becoming appre- hensive and that some debtor is having trouble in meeting his obligations is all that is needed to decide other hesitating creditors to put on the screws. And each new effort to reduce outstanding credits spreads wider the knowledge of what is going on, and strengthens the movement toward liquidation. The more general such a movement becomes, the more difficult it is to carry through without disaster. For the money and investment markets promptly become more tense than ever. The demand for loans which falls upon any bank is swelled not only by the men who are being pushed to settle by other banks and by mercantile or manufacturing concerns, but also by the men who seek to fortify their position by having funds in readiness to meet demands which may be made upon them. For, when a serious crisis is thought to be impending, it seems wiser to pay interest on money which may not be needed for some time than to risk inability to secure it later. In addition, enterprises 514 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA which have bonds maturing, or which must raise money to pay for contract work nearing completion fall back upon the banks because investors will not take their long-time obligations. This sudden increase in the demand for loans to meet outstanding obligations much more than makes up for the decrease in the demand for loans to finance fresh business ventures. On the other hand, banks are particularly loath to increase loans at such seasons if they can help it. Their reserves were reduced to a low point by the preceding period of prosperity, and experience teaches that if the situation goes from bad to worse they may be subjected to heavy demands from depositors and require very large reserves to maintain their own prestige. Further, the risk of loss on bad debts increases with the demand for loans. Heavy failures are likely to occur, and no one can tell what enterprises will be crippled by these failures. The one certainty is that the banks holding the paper of bankrupt firms will suffer delay and perhaps a serious loss on collection. Hence each bank is disposed to limit its efforts to "taking care of its own customers."^ Such a restriction of loans, however prudent it may appear from the view- point of a single bank, aggravates the stress. On the one hand, it increases the likelihood that some of the enterprises already trying to raise money will fail and be pushed to the wall; on the other hand, it increases the general uneasiness and makes the pressure for liquidation more general and more intense. Thus matters nm along for some days or weeks, the strain becoming more severe until the bankruptcy of one or more conspicuous enterprises pub- lishes abroad the gravity of the situation. "V\''hat happens then depends primarily upon the leading banks. The crisis may degenerate into a panic, or its severity may be greatly mitigated by effective measures of relief. The best way of presenting these alternatives is to describe two concrete instances in detail — a typical panic and a typical crisis. II. A Typical Panic — The United States, 1907 Since 1890 the United States has had two great panics, w^hile England, France, and Germany have had none. We are therefore confined to the study of Am_erican experience in 1893 and 1907. The phenomena of these two panics are sufficiently alike to make a review of one suffice for present purposes. The later is preferable, not only because it is closer to contemporary interests, but also because more material is available concerning it, and because it is not complicated by a monetary problem." 1 Particularly when the banking system has such a rudimentary organization as in the United States at present. Compare section v, below. 2 Ou the panic of 1893 see Chapter III, iii, 6; A. C. Stevens, "Analysis of the Phenomena of the Panic in the United States in 1893," Quarterly Journal of Economics, January, 1894; 0. M. W. Sprague, History of Crises Under the National Banlcing System (Publications of the National Monetary Commission), Chapter IV; W. J. Lauek, The Causes of the Panic of 1893, Boston and New York, 1907. A very brief description of the panic of 1907 is given above in Chapter III, viii, 4. MITCHELL: BUSINESS CYCLES 515 1. The Beginning of the Panic of 1907 It was a series of bank failures in New York which turned the crisis of 1907 into a panic. Months before the panic broke out, tension in the investment market had caused a slackening of new construction. Copper was among the commodities which suffered a loss of demand. Its price fell from 26 cents a pound early in the year to 20 cents in July, 151/2 cents in September, and 12 cents in October. Of course, the prices of stocks in copper mining companies also fell heavily. In turn this fall embarrassed the capitalists who were large owners of copper stocks and who presumably depended on these securities to serve as collateral for heavy loans. Among these capitalists was one, Mr. P. A. Heinze, who organized a pool to bolster up the prices of shares in the United Copper Company. On October 14th the pool succeeded in running up the prices of this stock on the "curb" from 371/4 to 60. But this success was brief. Next day the price declined again, and on the 16th it tumbled to 10. Gross & Klee- berg failed, alleging that the brokerage firm of Heinze 's brother would not take stock bought for their account. Next day the latter firm — Otto Heinze & Company — suspended. This episode in copper stocks made trouble because Mr. F. A. Heinze was president of the Mercantile National Bank. It was believed that he "owned the control" of this institution, and suspected that he had taken advantage of that fact to obtain large loans upon the security of the stocks which had fallen so heavily in price. Naturally, the bank's depositors became alarmed and began to withdraw their accounts. The suspicion spread quickly to seven other banks which were controlled by Messrs. C. W. Morse, E. R. and 0. P. Thomas — men believed to have close business affiliations with the Heinzes. The names and sizes of these banks are shown by the following table.^ The insti- Capital and Deposits on surplus Oct. 12 Mercantile National Bank* $8,043,600 $11,569,400 Consolidated National Bank 2,114,700 3,913,300 National Bank of North America* 4,407,600 13,320,000 Mechanics and Traders Bank* 2,943,300 19,001,000 New Amsterdam National Bank* 1,266,600 5,132,900 Fourteenth Street Bank* 1,416,200 7,392,300 Hamilton Bank 488,700 7,210,000 Hudson Trust Company 1,106,000 3,828,000 $21,786,700 $71,366,900 tutions starred were members of the Clearing House. Distrusting their ability to meet the demands of depositors, these institutions appealed to the Clearing House for help. After examination to determine their condition, the Clearing House pledged its aid on condition that the Heinze, Morse, and Thomas interests withdraw from control. These arrangements were completed by Sunday, October 20th, when it was generally believed that danger of a panic had been averted. sBradstreet's, Oct. 26, 1907, 516 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA But next day confidence received a yet more serious shock. The president of the Knickerbocker Trust Company was credited with being interested in certain of the Morse enterprises. Distrust resulted in a succession of unfavor- able clearing-house balances, and on Monday the National Bank of Commerce announced that it would no longer act as clearing agent for the trust company. Tuesday, October 22, the Knickerbocker opened its doors to a run, and suspended after three hours, during which it claimed to have paid out some $8,000,000.* The Knickerbocker Trust Company was the third largest institution of its kind in ISTew York, and had deposits of about $62,000,000. Its failure caused widespread alarm, and precipitated runs on the Trust Company of America (deposits $64,000,000) and the Lincoln Trust Company (deposits $22,400,000). To add to the distrust, several of the Westinghouse companies went into the hands of a receiver on October 23rd, and the Pittsburgh Stock Exchange was closed. Next day several runs began on banks and trust companies in New York, and the Hamilton and Twelfth Ward Banks suspended payments as a safety measure. The day following several other suspensions were announced by banks and trust companies — one in Manhattan, four in Brooklyn, and one in Providence. 2. The Scramhle for Money The salient feature of the panic precipitated by this epidemic of bank troubles was a desperate scramble for monej^ To the New York banks which were actually subjected to runs, and to the banks which feared lest they might be, large supplies of currency were a matter of self-preservation. Out-of-town banks, knowing that panic in New York would spread to the rest of the country, and remembering that remittances had been scaled down or refused in 1893, ordered the return of their balances with reserve agents and "called" the loans they had outstanding with stockbrokers. Timid depositors sought to get their money into their own hands, and many large business men locked up such sums as they could secure in order to be fortified against emergencies and prepared to take advantage of favorable opportunities — such as stock sales at bargain prices or a premimn on currency. The first relief measures were directed toward enabling the Trust Company of America and the Lincoln Trust Company to meet the run by their depositors. October 23rd a committee of trust-company presidents was formed to aid them 4 Compare Sprague, History of Crises Under the National Banking System (Publications of the National Mon- etary Commission), pp. 251, 252. Mr. Edmond Kelly says that the Knickerbocker Trust Company had become "an independent financial power" of which the "Wall Street Group" was jealous, and that this group took advantage of the institution 's temporary financial embarrassment to get rid of its eflicient president Mr. Charles J. Barney. Subsequent events proved that the company was solvent, and might have been saved from passing into the hands of receivers. Twentieth Century Socialism, New York, pp. 182-184. Interesting personal details concerning this incident and its consequences are given by Carl Hovey, The Life Story of J Pierpont Morgan, N. Y., 1911, eh. XrV. MITCHELL: BUSINESS CYCLES 517 by advancing cagh and securities to be used as the basis of loans. The Secre- tary of the Treasury deposited $35,000,000 in the national banks within four days, and much of the large share allotted to New York was transferred to the threatened trust companies. Meanwhile, to prevent the further collapse of prices on the Stock Exchange, a pool was formed to lend $25,000,000 on call on October 24th, and $10,000,000 on the 25th. But it was not until October 26th — four days after the suspension of the Knickerbocker Trust Company — that the New York Clearing House began to issue clearing-house loan certifi- cates.^ While this measure improved the situation by enabling the banks to lend more freely, it was coupled with another measure which intensified the scramble for money. Although the New York bank reserves had not declined seriously by October 26th — for most of the millions absorbed by the trust-company runs and shipped to out-of-town banks had been provided by the government deposits — the banks began to restrict their payments of cash as soon as the issue of clearing-house loan certificates was authorized. Then out-of-town banks, think- ing themselves in desperate need of lawful money for reserves, and employers who could not get from their banks enough money to pay wages, were compelled to buy currency at a premium from brokers. A premium on currency was first reported by the press on the 30th of October. Early in November it rose as high as 4 per cent, remained above 1 per cent until the second half of December, and did not disappear until the last two or three days of the year." Of course the existence of the premium gave depositors an additional incentive for drawing money out of the banks, and gave those who received money an additional incentive for refusing to deposit it. Moreover, the pre- vailing distrust of the banks on the part not only of the general public but also of each other was augmented by the refusal to honor in full checks and demands for remittances. On the other hand, the premimn may have induced some men who had locked up money in safety deposit boxes to sell their hoards. But the scramble for money was certainly rendered more rather than less intense by the restriction of payments on the part of the New York banks. The $35,000,000 transferred from the federal sub-treasuries to the national, banks was the first addition made to the supply of money in circulation. But much more was needed, and the banks resorted to an increase of their notes and an importation of gold. Neither measure, however, gave prompt relief. It was not until after the first of November that the bank notes began to increase rapidly, and not until the week ending November 9th that the first shipments of gold were received.^ 5 Sprague regards this delay as "the most serious error made" in managing the panic of 1907. Op. cit., ^ 6A p Andrew, "Hoarding in the Panic of 1907," Quarterly Journal of Economics, February, 1908. ■r For the importation of gold see Table 131, below. The volume of national-bank notes outstanding was as follows: 518 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA In the meantime the panic had spread rapidly from New York to the interior. In two-thirds of the cities having more than 25,000 inhabitants the banks fol- lowed the example of the metropolis in suspending cash payments to a greater or less degree/ Since lawful money could not be provided quickly enough to meet the insistent demand, a variety of substitutes for cash came into use. An attempt made by Dr. A. P. Andrew to ascertain the amount of this illegal and inconvertible paper money yielded the following result: Millions of dollars Clearing-house loan certificates (large) 238 Clearing-house loan certificates (small) 23 Clearing-house checks 12 Cashiers' cheeks 14 Manufacturers' pay checks 47 Total 334 But this record was far from complete, and Dr. Andrew thought it safe to "place an estimate of the total substitutes for cash above 500 millions."" Developments in New York can best be followed by aid of the annexed table, which shows the recorded movements of money into and out of the clearing- house banks. Before the panic began, money was being shipped westward from New York for crop-moving purposes at about the usual rate ; but the time was close at hand for this movement to decline." The panic quadrupled the outflow October 1 $603,900,000 December 1 $656,200,000 October 15 607,100,000 December 15 676,900,000 November 1 611,800,000 December 31 690,100,000 November 15 631,300,000 January 18 695,900,000 Response of the Secretary of the Treasury to Senate Resolution no. 33 of December 12, 1907 (60th Con- gress, 1st session, Senate Document 208, pp. 11, 126). To provide lawful security for this increase of notes and for further government deposits, on November 17th the Secretary of the Treasury offered to receive subscriptions for $50,000,000 in Panama Canal bonds and $100,000,000 in 3 per cent certificates of indebtedness, and to permit 90 per cent of the proceeds of the bonds and 75 per cent of the proceeds of the certificates to remain in the national banks as government deposits. But only $24,631,980 of the bonds and $15,436,500 of the certificates were actually sold. (Report of the Sec- retary of the Treasury, 1908, pp. 21, 22.) 8 A. P. Andrew, ' ' Substitutes for Cash in the Panic of 1907, ' ' Quarterly Journal of Economics, August, -1908, pp. 501, 502. Ihid., p. 515. As an additional aid to the banks in restricting payments, the governors of Oklahoma, Nevada, Washington, Oregon, and California declared a succession of legal holidays. Sprague, op. cit., 286, 287. 10 The average gain (-f) or loss ( — ) to the New York banks by interior movements of cash during the months October to January in the ten years 1899-1908 was as follows. The amounts are stated in thousands of dollars. October — 1st week — 3,883 December — 2d week — 836 October — 2d week — 2,543 December — 3d week + 515 October — 3d week — 3,014 December — 4th week -j- 60 October — 4th week — 3,685 December — 5th week -|-2,188 November — 1st week — 2,700 January — 1st week -|-6,684 November — 2d week — 2,666 January — 2d week -|-6,621 November — 3d week — 1,530 January — 3d week -|-7,773 November — 4th week — 563 January — 4th week -{-6,895 December — 1st week — 213 E. W. Kemmerer, Seasonal Variations in the Demand for Money and Capital in the United States (Publica- tions of the National Monetary Commission), p. 125. MITCHELL: BUSINESS CYCLES 519 in the last week of October and caiised it to increase still further throughout the first half of November. Thereafter the shipments declined ; but the current did not set in favor of New York until the first of the New Year — three weeks later than usual. Of course these figures mean that the restriction of payments TABLE 131 Becorded Movements of Monet into and out of the Clearing-house Banks of New York City during the Panic of 1907 In millions and tenths of millions of dollars Net gain ( + ) or loss ( — ) by Weeks ending Reserves of the banks Shipments to and from interior Sub-treasury operations Imports and exports , of gold ToWls of the three preceding columns Net gain ( + ) or loss ( — ) in bank reserves October 5 261.8 — 3.9 — 1.0 + .1 — 4.8 — 7.6 12 261.2 — 4.9 4- 1.0 + .2 — 3.7 — .6 19 267.6 — 4.4 + 4.0 — .4 + 6.4 26 254.7 —16.3 -u; 21.0 — 1.3 + 3.4 —12.9 November 2 224.1 —17.0 -r 9.5 — .5 — 8.0 —30.6 9 219.8 —17.4 +: 15.0 + 7.3 + 4.9 — 4.3 16 218.7 —22.6 — 6.1 +21.1 — 7.6 — 1.1 23 215.9 —17.3 -r .6 +12.4 — 4.3 — 2.8 30 217.8 —10.6 — .6 +16.5 + 5.3 + 1.9 December 7 222.5 — 9.0 + 3.5 +13'.8 + 8.3 + 4.7 14 226.6 — 6.8 — 2.8 + 9.5 — .1 + 4.1 21 233.1 — 5.2 + 1.4 + 5.7 + 1.9 + 6.5 28 242.6 — 2.2 + 2.4 + 4.1 + 4.3 + 9.5 January 4 250.6 + 5.5 — 4.3 + 5.3 + 6.5 + 8.0 11 269.0 +13.4 — 4.6 + 3.6 +12.4 +18.4 18 295.2 +12.3 + 3.5 + .5 +16.3 +26.2 25 318.9 +20.6 + 1.5 + .4 +22.5 + 23.7 Compiled from the Commercial and Financial Chronicle. The interior movements and sub-treasury operations are for weeks ending one day earlier than indicated by the table. For the weeks ending November 15 to January 10, the Chronicle gives the net result of sub-treasury operations and gold imports together; but as it also gives the gold imports separately it is easy to segregate the two movements. by the New York banks was far from total ; on the contrary, they supplied the interior banks with nearly $125,000,000 between the outbreak of the panic and the end of the year. Only a small part of these funds, however, came out of the reserves of the banks. At first the bulk was provided by the treasury, and when that source began to fail the gold which had been ordered from Europe began to arrive. Indeed, these receipts of money from the government and from abroad exceeded the western shipments during the first seven weeks of the panic. 520 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA If the data be trustworthy, then, the decline of the bank reserves in New York was caused mainly by a local drain — the runs on the trust companies for which the clearing-house banks found money, and hoarding." The heavy loss of cash, however, was confined to the first two weeks of the panic, and after the fifth week the reserves began to rise steadily. At the lowest ebb the bank statement showed not less than $215,851,100 of specie and legal tenders on hand, equal to 19.98 per cent of the deposits. It was therefore not actual lack of money, but timidity in using bank reserves which explained the restriction of payments and the resulting premimn on currency.^" The next table shows how the money in circulation was increased. Between the last days of September and of October only 14 millions were added to the monetary stock; but the treasury transferred 57 millions from its vaults to TABLE 132 Amount op Money in the Teeasuey as Assets and the Estimated Amount in Cieculation dueing the Panic OF 1907 Gold coin and bullion.. Gold certificates Silver dollars Silver certificates Subsidiary silver TJ. S. notes Treasury notes National-bank notes.... In millions of dollars Money in the Treasury as September 30, 1907 .. 200 .. 81 4 .. 13 20 Total 329 October 31, 1907 167 71 2 7 7 3 Assets November 30, 1907 174 72 15 272 261 December 31, 1907 189 60 11 January 31, 1908 177 41 11 11 30 270 286 Estimated Amount in Circulation September October November " 31,1907 574 30, 1907 Gold coin 562 Gold certificates 640 677 Silver dollars 85 89 Silver certificates 461 464 Subsidiary silver 125 127 U. S. notes 343 343 Treasury notes 6 6 National-bank notes 584 595 30, 1907 640 676 91 469 133 345 6 649 December 31, 1907 649 707 91 468 135 345 5 679 January 31, 1908 641 770 90 453 131 339 5 665 Total 2806 2.S76 3008 3079 3094 Estimated stock of money 3135 3149 Per cent in the Treasury as Assets 10.5% 8.6% Per cent in circulation 89.5 91.4 Compiled from the Reports of the Treasurer of the United States. 3269 8.0% 92.0 3349 8.1% 91.9 3380 8.5% 91.5 11 The Trust Company of America is said to have paid out some $34,000,000 in two weeks. Sprague, op. cit., 12 Compare Sprague, op. cit., pp. 260-277. MITCHELL: BUSINESS CYCLES 521 the banks, so that the amount in circulation increased about 70 millions. There- after the increase came chiefly from the importation of gold and the issue of new bank notes. Between the end of October and the end of December the circulation of gold coin and certificates rose 105 millions, bank notes 84, silver dollars and silver certificates 6, subsidiary silver 8, and greenbacks 2 millions. In the hurry of the panic, banks did not stop to take out gold certificates, but used gold coin with unaccustomed freedom. The very unpopularity of the latter medimn rendered it more acceptable to banks which were endeavoring to restrict withdrawals of deposits. In all $273,000,000 were added to the money in circulation between September 30th and the end of the year. But even this huge sum was far from adequate; for, if Andrew's estimate is not exaggerated, more than twice as much unlawful currency was provided in the form of sub- stitutes for cash. The monetary demands created by a panic seem to be insati- able, because a comparatively small decrease in the use of credit instruments makes a large increase in the need of money. Still more striking results would appear if we had for these months data concerning the distribution of the money in circulation between the banks and the public. But Secretary Cortelyou has prepared an interesting substitute for such figures in the shape of an estimate of the money absorbed by the public during the panic. The sums are given in millions of dollars." These figures show that the national banks of the whole country lost less cash than those of New York United City States Keduction in cash held by the national banks between August 22 and December 3 42 41 Net importations of gold, November 1 to December 31 94 106 Increase in government deposits in the national banks, August 22 to December 3 48 80 Increase in bank-note circulation, August 22 to December 3 16 50 Seduction in cash held by the state banks and trust companies of New York City, August 22 to December 19 19 19 Total 218 296 New York City. In other words, the banks outside of the metropolis partici- pated in the scramble for money and locked up what they laid hands on. This fact is brought out more clearly by Table 133. In Chicago, St. Louis, and the reserve cities the banks used their reserves, though timidly, to meet the demands for money; but in the smaller towns the very banks which were forcing substi- tutes for cash upon depositors increased their own holdings of lawful money. 13 Eesponse of the Secretary of the Treasury to Senate Resolution no. 33 of December 12, 1907 (60th Con- gress, 1st session, Senate Doe. 208), pp. 14, 15. 522 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 133 Cash Eesebves and Net Deposits with Eesebve Agents held by the National Banks of Different Classes ON August 22 and December 3, 1907 In millions of dollars Central reserve cities Reserve cities Country banks New York Chicago St. Louis Cash reserves $ $ $ $ $ August 22 218.8 66.1 26.8 190.3 199.6 December 3 177.1 54.0 21.0 162.6 246.0 Gain ( + ) or loss (- -) ... — 41.7 —12.1 — 5.8 — 27.7 + 46.4 Percentage of reserves % % % % % August 22 26.5 25.2 23.0 13.4 7.6 December 3 20.5 23.1 19.6 12.9 9.9 Gain ( + ) or loss (- -) ... — 6.0 — 2.1 — 3.4 — .5 + 2.3 Net deposits with reserve agents $ $ August 22 166.5 410.0 December 3 139.7 . 356.0 Gain ( + ) or loss (— -) — 26.8 — 54.0 From O. M. W. Sprague, Crises under the National Banking System, (Publications of the National Monetary Commission), pp. 305, 308, 309, 310. A slight mistake in Sprague's figures for the gain in cash by the country banks has been corrected by reference to the Report of the Comptroller of the Currency, 1908, p. 195. 3. The Demoralization of the Markets for Loans and Investments This desperate scramble for cash threw the money market into confusion. Business journals testify that collections were seriously intefered with, so that many business enterprises were temporarily deprived of the regular remit- tances of funds on which they had been counting to meet their current expenses and their financial obligations. More precise information concerning the confusion which reigned in all matters pertaining to pajrments between different places is given by the fol- lowing table of domestic rates of exchange. In ordinary times these rates fluctuate within limits set by the cost of shipping currency, including insurance and the loss of interest during transit. Even between San Francisco and New York 40 cents per thousand dollars is the usual shipping point, so long as paper money is available for remittance.^' But in November, 1907, rates as high as $2 prevailed in places so close to New York as Boston and Philadelphia. In some towns the extraordinary • rates were premiums and in other towns dis- counts. The whole machinery for making payments was thrown out of gear for a month or two, and the resulting embarrassment to business houses and banks must have been severe." i-iKemmerer, op. cit., p. 118. 15 Compare Sprague, op. cit., pp. 291-297. MITCHELL: BUSINESS CYCLES 523 TABLE 134 Eates op Exchange on New York in Various Cities During the Panic of 1907 Week ending October 26 Boston $ .25 discount Philadelphia Par Cincinnati $ .25 discount $ Kansas City .25 premium November 2 .25 discount 50 disponnt .25 premium 1.00 premium 9 .30 premium $2.50 premium Par- .25 discount 16 1.50 premium 5.00 premium Par- .60 discount 1.00 premium 23 2.00 premium 2.50- -$4.00 premium Par- .60 discount 1. 00 premium 30 Par 2.00- - 3.00 premium 1.00 premium 1.00 premium December 7 .25 discount 1.50 - 2.50 premium .30- .50 discount • 1.00 premium 14 .30 discount 2.50 premium .50 discount 1.00 premium Successive weeks of Chicago St. Louis New Orleans San Francisco October 1st $ .25 discount $ .75 discount $ .75 discount $ .20 premium 2iid .20 discount .45 discount .35 discount .60 discount 3rd .20 discount .60 discount .35 discount .70 discount 4th .25 discount 2.00 discount .75 discount 10.00 discount November 1st .25 discount .30 discount 1.50 discount 7.50 discount 2nd Par 2.50 premium 2.00 discount Unsaleable 3rd .25 premium 4.00 premium 1.50 discount Unsaleable 4th 1.00 premium 6.00 premium 1.00 discount Unsaleable December 1st 1.00 premium 2.00 premium .80 discount 5.00 discount 2nd Par 2.00 premium .40 discount 3.50 discount 3rd Par 4.00 premium .40 discount 4.00 discount 4th .50 discount 3.00 premium .75 discount 4.00 discount 5th .50 diseoimt 2.00 premium .85 discount Data for the first four cities from Sprague, Bistory of Crises under the National Banking System, pp. 291, 292; for the second four cities from Kemmercr, Seasonal Variations in the Relative Demand for Money and Capital in the United States, p. 372. In all cases the quotations are for $1,000 of New York exchange. Other anomalies were observed in the market for foreign exchange. It was fortunate for the country that few finance bills were outstanding when the panic broke out. In October, 1906, the Bank of England had been forced to advance its rate of discount to 6 per cent in order to check an outflow of gold to America. It took advantage of the occasion to warn the other London banks that the accepting of more finance bills for New York account would menace the stability of the local market. The monetary stringency of the following months in America was partly caused by this step. New York financiers were forced to settle for their old bills as they matured and could get no further advances of moment. Moreover, an unusually small amount of anticipatory bills had been drawn in the summer of 1907 against shipments of produce. 524 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Hence, when the export movement of wheat and cotton began in the autumn, the proceeds of the bills of exchange were not required to settle old debts, but supplied credits against which gold could be demanded/" The panic also caused a rapid decline in imports of commodities, so that the favorable balance of payments on merchandise account reached unprecedented proportions." All this was highly favorable to the banks, and, as we have seen, enormous amounts of gold were imj^orted — 63 millions in November, 43 in December, and 10 in January. The curious feature of the situation was that these impor- tations were made in the face of quotations for sterling bills high above the import point. Under ordinary circumstances the import point for sight exchange, with discount at 6 per cent, is about $4.8414 and the export point is about $4.88.'^ Just before the panic, the actual rates for bankers' sight bills stood in the neighborhood of 4.86. In the first turmoil they dropped as low as 4.8214 on October 26th — considerably below the import point. But a quick rally brought them up to 4.86% — 88 on November 2nd. During this whole month the lowest quotation was 4.85-851/4, while the highest quotation was 4.88i4>-4.88%." That is, tens of millions of gold were engaged for import at prices for bills always well above the import point and sometimes exceeding the export point. Of course, the explanation is that the importing banks could sell the gold "to arrive" at a premiiun of perhaps 1 to 3 per cent. It does not follow that the premium on currency facilitated imports ; but simply that this premium affected the nominal prices of bills of exchange, when the bills were paid for in checks upon banks which were restricting withdrawals of cash. On the Stock Exchange the panic wrought havoc with prices. Common stocks were most seriously depressed, but preferred stocks also fell heavily (Table 135). Even high-grade railway bonds sold off several points. The lowest prices in all classes of securities were touched in November. December brought a distinct rally, and January, the first month after the panic, showed higher prices for bonds and preferred stocks than September, the last month before the panic. Common stocks, however, were slower in recovering. The one encouraging feature of the market was that sales at these low prices were not made on a large scale. During the severe liquidation of March, 1907, over 32 million shares of stock had changed hands in a single month. In October the sales were not much over half and in November less than a third 10 Sprague, op. rit., pp. 241 and 246. 1' The imports and exports of merchandise were as follows: Imports Exports Balance September $103,400,000 $135,400,000 +$32,000,000 October 111,800,000 180,400,000 + 68,600,000 November 110,900,000 204,500,000 + 93,600,000 December 92,300,000 207,100,000 +114,800,000 January 85,000,000 206,200,000 +121,200,000 Compiled from the MoiUMy Summary of Commerce and Finance. ISA. Strauss, "Gold Movements and the Foreign Exchanges," in The Currency Problem and the Present Financial Situation, a series of addresses delivered at Columbia University 1907-08, pp. 65-67. 19 Financial Review, 1908, p. 59. MITCHELL: BUSINESS CYCLES 525 TABLE 135 Prices and Volume of Business on the New York Stock Exchange During the Panic of 1907 Relative Prices of Bonds and Stocks Average actual prices 1890-99=100 Bonds of the Ten West Shore railway K. R. bonds 95.4 105.6 Ten preferred stocks 123.0 Ten common stocks 205.0 Forty common stocl is September Grand averages 197.0 Averages of Averages of highest lowest relative relative prices prices 204 190 October 94.5 103.3 126.0 169.5 171.5 192 151 November 90.9 99.5 117.5 152.5 159.0 169 149 December 92.9 101.6 123.5 161.5 167.0 176 158 January 95.9 105.8 124.5 166.5 174.5 186 163 September October November December Volume of Business Tr Par Value of ansacted Actual value of stocks sold a 902 1127 617 779 Number of shares sold b 12.2 17.3 9.7 12.6 > .Hi \0 \5\ U3 1 •^ Bonds Stocks sold sold a a 25 1088 50 1551 63 849 60 1072 a: < a=in millions of dollars. &=in millions of shares. January 86 1396 1016 16.6 1 jm Data concerning prices of securities from the Tables in Chapter IV, iii and iv above. Data concerning i volume 1 of business from the ''Quotation Supplement" of the Commercial and Financial Chronicle, and the Financial Review. of this volume. Doubtless the drastic decline of the spring and summer months had already forced most of the weaker holders to dispose of their stocks. In addition, the banks made considerable effort to sustain the market, first by contributing to the money-pools of October 24th and 25th, and, after clearing- house loan certificates had been issued, by refraining from forcing repayment of call loans, and by taking over loans called by the trust companies and out- of-town banks. Indeed, this policy of forbearance was compulsory. Brokers and their customers could not have found the money to settle had all the banks stopped lending on the one hand, and on the other called in their outstanding loans. And if the banks had endeavored to get back their money by selling the stocks pledged with them as collateral, the resulting fall of prices in a market where no one could borrow would have wiped out their margins of security and left them with heavy losses. Judging from the comments of the press on the sudden increase in "odd-lot" sales, the purchasers at this season were largely small investors. The low prices offered tempting bargains to all who had funds available for payment. The bond sales were much heavier relatively than the sales of stocks, both because purchasers faced smaller risks in taking bonds under panic conditions, and because the slighter decline in price made the man who was forced to raise money by parting with his securities prefer to let bonds go rather than stocks. 526 MEMOIRS OP THE UNIVERSITY OP CALIFORNIA The most violent manifestations of the panic appeared in the market for short-time loans. Unfortunately, we have statistics of discount rates for New York City alone.^° The best compilation of these figures, that published in the Financial Review, is partially reproduced in the following table for the weeks preceding, during, and following the panic. The exceedingly high rates for call loans are the most spectacular feature of this exhibit.^^ But we have seen that these rates did not force such a ruinous liquidation as might have been expected. In any case, the eccentricities of the call-loan rate possess less significance for general business than the demoral- ization of the market for time loans and commercial paper. TABLE 136 Rates of Interest in New York During the Panic of 1907 Weeks ending 1907 October November December 1908 January 4 11 18 25 1 8 15 22 29 6 13 20 27 3r 3= 10 17 24 31 Prem- ium on cur- rency Range 1 -3 1 -4 2i-4 li-3i i-2 l-U ir-U Call Loans At Banks At Stocli and Exchange Trust -, Go's. Range 3-10 2i- 6 2J- 10 5 -125 3-75 4 - 25 5-15 3J- 15 Aver- Mini- age mum 3 3 2 6 6 5 5 - 2 - 2i- U- n- 12 13 25 17 25 20 20 9 5 5 5 40 50 22 10 10 7 6 18 12 20 17 10 6 4 2 11 4 3 n n Commercial paper Time Loans Double names Single names 60 days Range 51- 6 90 days Range 6 - 6J 4 mos. Range 6 -6i 6 mos. Choice 60-90 days Range Range 7 6J 6J- 7 12 - 7* -16 12 -15 12 -15 6i- T 12 -16 12 -15 12 -15 12 -15 12 -15 6J 6 6i-7* No business No business No business No business No business 7= 7 -7J' Prime 4-6 mos. Range 7 75 7 7 -7i» -7¥ Good 4-6 mos. Range 7 -7¥ 7¥+ No business -7J» 7 -7J= -7J= 7 -7i» No business 8 No regular rates: All business by special agreement 8 -10 12 12 10 10 6J 51 4 3 - 3J 8 -10 10 10 10 -12 5J 10 6 51 4i 3 -3J 5i 7 6 5i-5i 4i 4J 7 -8 6 -7 7J-8 5^-6 5 6i-7J 6J-7 5J 5i-6 6i-7J Gl-7 6 -6J 5J-6 7J 6i-7 6 -6i ^ Covers business for last two days of year. ^ Covers business for iirst three days of year. ^ Banks and trust companies out of the market. ^Nominal rates; no offerings. ^ Quotations entirely nominal ; no business. (From the Financial Review^ 1909, pp. 40, 41.) ^» Bradstreet's, indeed, publishes the nominal rates of discount in a number of cities; but Table 136 shows that nominal rates are not trustworthy indices of money-market conditions during a panic. For that reason it would be vain to compile the figures for other towns. 21 The statement made in the table that the banks and trust companies were out of the call-loan market from the last week of October to the end of the year does not mean that they lent no money on call. They did lend perforce at the "money post" on the Stock Exchange, though not over their own counters. Compare Mr. T. F. Woodlook's excellent paper on "The Stock Exchange and the Money Market," in The Currency Problem and the Present Financial Situation, a series of addresses delivered at Columbia University, 1907-08. MITCHELL: BUSINESS CYCLES 527 Rates of 12 per cent and over are bad enough, but far worse are the entries "no business" and the footnotes which explain that the quotations in the table are purely nominal, because no loans were being made.'' At a pinch, the merchant and the manufacturer may be able to pay 10-15 per cent for loans during a month or two. Not to be able to get loans at all is a far worse plight. And many enterprises must have found themselves in this predicament for six or eight weeks. No doubt most of the strong banks "took care of" such regular customers as seemed to be really solvent. But the enterprises which relied largely for loans upon selling their commercial paper through note brokers had no such protection. Further light is thrown on the extreme stringency of the money market during the panic by the following data concerning the clearing-house banks in New York, Boston, Philadelphia, Chicago, St. Louis, Ncav Orleans, and San Francisco. The New York banks increased their loans more than 10 per cent in the very height of the panic ; in Boston and Philadelphia the changes were slight ; but in the other cities the banks contracted loans, slightly in St. Louis, heavily in Chicago, New Orleans, and San Francisco. The exceptional action of the New York banks is accounted for by the facts that the trust companies were compelled to liquidate loans whenever possible, and that the outside banks followed the same course. "These two groups of lenders more than exhausted the possibilities of contraction in New York, and a part of their loans had to be taken over by the clearing-house banks to prevent a general disaster. ' '" Of course, the extreme reluctance of the banks to make new or even to extend old loans aggravated the panic among business men who needed to borrow. Deposits fell off faster than loans were contracted in Chicago, St. Louis, and San Francisco. It might be expected that the difference would be accounted for by a reduction of reserves. But such is not the case. Even where reserves declined, the loss of cash is not sufficient to sustain the theory that the banks were paying off depositors in cash taken from their vaults. If such with- drawals were permitted on a considerable scale, despite the restriction of pay- ments, they were more than offset with funds imported from Europe, obtained from New York, or raised by selling bonds. In New Orleans the decline of deposits was very slight, and in New York deposits increased some $63,000,000 in the first four weeks of the panic. This increase was due to the expansion of loans by $115,000,000. The difference between these two sums— $52,000,000 —is nearly equalled by the concomitant drop of $49,000,000 in the reserve. Finally, the table shows again how tenaciously the banks held to their cash in the face of the most urgent demands from their customers. Though the 22 Probably the 60- and 90-da.y loans made at 12 per cent and over in November went largely to stock- brokers who usually carry half or more of their loans on time, and depend on call money for the balance. Some of these time loans to brokers had to be renewed during the panic, as part of the plan to forestall worse things on the Stock Exchange. 23 Sprague, op. cit., p. 300. Compare Chapter VII, i, above. 528 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 137 Loans, Deposits, and Eeserves of the Clearing-house Banks op New Yoek, Boston, Philadelphia, Chicago, St. Loms, New Orleans, and San Francisco, During the Panic op 1907 In millions of dollars , New York City C Ihicago Loans 1089 Deposits $ 1037 Reserves A Loans $ 279.7 Deposits 405.2 Reserves Week ending October 5 Amount Eatio $ % 262 25.3 Amount $ 62.7 Ratio % 15.5 12 1083 1026 261 25.5 276.7 402.8 62.8 15.6 19 1077 1026 268 26.1 277.1 398.9 59.0 14.8 26 1088 1024 255 24.9 279.3 391.6 54.5 13.9 November 2 1148 1052 224 21.3 276.0 384.3 53.9 14.0 9 1187 1087 220 20.2 271.2 376.8 55.7 14.8 16 1192 1089 219 20.1 270.8 372.4 55.8 15.0 23 1188 1080 216 20.0 265.1 370.5 58.1 15.7 30 1198 1083 218 20.1 261.1 371.1 63.8 17.2 December 6 1186 1075 223 20.7 258.0 369.8 65.3 17.7 13 1175 1067 227 21.2 255.0 363.4 65.6 18.1 20 1165 1059 233 22.0 252.5 363.2 66.5 18.3 27 1148 1051 243 23.1 250.2 358.9 69.0 19.2 January 4 1133 1048 251 23.9 247.3 363.3 71.5 19.7 11 1117 1052 269 25.6 244.0 371.8 74.8 20.1 18 1127 1090 295 27.1 243.5 381.2 76.0 19.9 25 1136 1127 319 28.3 246.3 389.5 77.4 19.9 TABLE 137— (Continued) Loans, Deposits, and Reserves op the Clearing-house Banks op New York, St. Louis, New Orleans, and San Francisco, During the In millions of dollars Boston, Philadelphia, Chicago, Panic op 1907 ing 5 Boston Philadelphia Loans $ 190.3 Deposits $ 214.8 Reserves A ' Loans $ 224.3 Deposits $ 252.9 Reserves A \ Week end October Amount $ 21.6 Ratio % 10.1 Amount $ 54.7 Ratio % 21.6 12 190.8 213.3 21.6 10.1 223.0 251.3 53.6 21.3 19 191.7 224.2 22.4 10.0 222.0 254.8 55.6 21.8 26 191.2 222.1 22.8 10.3 219.8 246.3 52.7 21.4 November 2 192.5 222.2 20.8 9.4 219.6 236.2 47.4 20.1 9 191.5 214.7 19.9 9.3 221.2 233.8 45.9 19.6 16 190.9 217.7 19.2 8.8 222.2 233.3 44.8 19.2 23 190.4 213.7 18.6 8.7 223.0 230.7 44.8 19.4 30 190.7 212.1 17.1 8.1 224.2 231.2 44.5 19.2 December 6 191.9 214.7 17.4 8.1 224.4 230.2 44.8 19.5 13 190.6 211.3 18.2 8.6 224.8 230.5 43.0 18.7 20 189.5 209.4 19.3 9.2 224.8 229.5 43.1 18.8 27 190.1 210.0 20.5 9.8 225.1 231.1 43.3 18.7 January 4 191.1 218.9 21.9 10.0 224.6 235.3 45.7 19.4 11 188.9 216.3 23.8 11.0 223.1 233.9 46.5 19.9 18 188.6 216.0 25.1 11.6 222.9 235.5 48.1 20.4 25 188.1 210.3 25.8 12.3 221.4 234.1 50.0 21.4 MITCHELL: BUSINESS CYCLES 529 TABLE 137— (Continued) Loans, Deposits, and Eeserves of the Cleabing-housb Banks or New York, St. Louis, New Orleans, and San Francisco, During the In millions of dollars Boston, Philadelphia, Chicago, Panic op 1907 ing 5 St. Louis New Orleans Loans $ 171.7 Deposits $ 203.4 Eeserves " Loans $ 65.9 Deposits 54.8 Reserves A ^ Week end October Amount $ 24.9 Ratio % 12.1 Amount $ 5.4 Ratio % 9.9 12 168.2 200.6 23.9 11.9 66.2 54.3 4.8 8.8 19 168.4 198.4 22.0 11.0 66.5 52.7 4.4 8.3 26 167.8 194.5 22.4 15.2 66.0 53.3 5.1 9.6 November 2 167.3 189.0 21.3 11.3 65.8 52.8 4.6 8.7 9 167.4 188.8 21.7 11.5 64.9 52.9 5.0 9.5 16 168.1 188.6 23.9 11.5 64.8 52.9 5.5 10.4 23 167.1 186.9 24.8 13.2 62.5 53.1 5.6 10.5 30 166.4 187.0 25.6 13.6 62.3 52.9 5.9 11.2 December 6 166.7 186.7 25.7 13.8 62.0 52.1 5.8 11.0 13 166.1 186.5 26.0 13.9 61.3 52.0 5.6 10.8 20 165.3 185.1 26.2 14.2 60.3 51.5 6.1 11.8 21 163.1 184.3 26.8 14.5 59.1. 51.9 6.2 11.9 J anuary 4 162.4 182.6 26.0 14.3 60.3 .51.5 6.1 11.8 11 160.3 181.0 26.4 14.4 59.1 51.9 6.2 11.9 18 157.5 180.4 26.7 14.2 58.2 51.6 6.3 12.2 25 154.1 176.6 27.2 15.3 57.3 51.5 6.0 11.7 TABLE m— (^Concluded) Loans, Deposits, and Reserves of the Clearing-house Banks op New York, Boston, Philadelphia, Chicago, St. Louis, New Orleans, and San Francisco, During the Panic op 1907 In millions of dollars San Francisco A Loans $ 93.0 Deposits 108.2 Reserves Weeks ending October 5 Amount $ 13.8 Ratio % 12.8 12 93.3 108.3 13.1 12.1 19 94.6 111.0 13.7 12.3 26 93.4 108.3 12.0 11.1 November 2 90.1 99.5 12.0 12.1 9 88.8 96.1 11.3 11.8 16 89.1 94.3 12.5 13.2 23 88.0 92.7 14.0 15.1 30 87.1 91.4 15.3 16.7 December 6 86.3 90.3 15.7 17.4 13 85.5 90.5 16.7 18.5 20 85.0 90.1 17.9 19.9 27 84.1 89.7 17.8 19.8 January 4 83.5 91.7 17.7 17.7 11 82.6 92.0 18.6 20.2 18 82.2 92.5 19.5 21.1 25 81.1 92.7 19.5 21.0 Comniled from E W. Kemmerer, Seasonal Variations in the Relative Demand ior Money and Capital in the Vnited States. (PubUcatiors of the National Monetary Commission). Pp. 258, 264, 269, 274, 275. The data for Boston and Philadelphia are compiled from the Commercial and Financial Chronicle. 530 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA New York banks displayed great nervousness in restricting payments, their course was bolder than that pursued by the banks in these other cities, with the exception of Boston and Philadelphia. After losing a relatively small sum in the first or second week of the panic, the banks of Chicago, St. Louis, New Orleans, and San Francisco all began to gain once more. By the end of November their percentages of reserve were higher than in the weeks pre- ceding the panic. Had the New York banks set the example of attempting to quiet the panic by meeting all demands in full, it is probable that the scramble for cash would never have assumed great dimensions and that the banks in other towns would have been able to maintain the same policy. But with restriction begun in New York, a timid policy may have been compulsory upon the banks in smaller places. Concerning the policy pursued by banks in other towns, our information is slight. The last report of the national banks before the panic was made August 22, and the next report not unt'il December 3. The changes between these two dates cannot with confidence be ascribed to the effect of the panic. The drift of this evidence, however, indicates that a moderate contraction of loans was practiced throughout the country, while deposits everywhere fell much more rapidly than loans. It has already been shown that reserves decreased a little in most of the reserve cities and increased in the country districts." 4. The Reaction of Monetary Stringency upon General Business On the one side, the panic intensified the process of liquidation — that is, the process of forcing the settlement of outstanding accounts. On the other side, it made the raising of money extremely difficult. The restriction of payments by the banks, the slowness of collections, the confusion of domestic exchanges, the fall in the prices of securities, the demoralization of the discount market, and the contraction of bank loans, one and all added to the troubles of debtors who were being pressed for payment. An increase in the number of business failures resulted. Table 138 shows, however, that this increase was not very great during the weeks when the panic was at its worst. On the other hand, the number increased as the panic relaxed after the first of the year. The explanation is partly that banks and other lenders made special efforts to allay distrust so long as the danger was most threatening, and partly that the Januarj'^ 1st settlements brought affairs to a head Avith many weakened firms. It has already been shown that just before and during a crisis the increase in the liabilities of firms which fail is more rapid than the increase in their ^■i See Table 133, and compare Sprague, op. cit., pp. 303-313. MITCHELL: BUSINESS CYCLES 531 TABLE 138 Weekly Number op Business Failures in the United States during the Panic op 1907, compared with the NUMBERS in THE CORRESPONDING WEEKS OP FOUR PRECEDING YEARS Corresponding weeks in Weeljs ending 1907 1906 1905 1904 1908 October 3 177 136 189 195 197 10 192 192 183 196 203 17 194 170 178 227 216 24 220 184 178 180 217 31 223 163 160 200 216 November 7 226 146 166 184 250 14 259 222 198 190 234 21 265 212 224 193 167 28 258 174 188 184 239 December 5 272 216 203 231 241 12 284 220 226 239 239 19 300 227 235 249 243 26 248 161 212 218 209 1908 1907 1906 1905 1904 January 2 345 185 220 278 262 9 435 283 286 295 315 16 431 234 279 304 266 23 408 252 276 228 242 30 359 211 228 239 216 Compiled from. Bradetreet's. number/' Dun's figures by quarters (Table 139) bring out the facts clearly with reference to the panic of 1907. Still more striking would be the showing if bank suspensions were included with these commercial and manufacturing bankruptcies. But, as they stand, the figures show that the average size of the enterprises dragged down by a panic considerably exceeds the size of those which fail during prosperity or those which succumb after the panic has yielded to depression. TABLE 139 The Number and Average Liabilities oe Business Failures in the United States 1907 1st By quarters, quarter 1907 and 1908 Number of failures 3,136 Average liabilities $10,228 2iid quarter 2,471 15,173 3rd quarter 2,483 18,714 4th quarter 3,635 22,379 1908 1st quarter 4,909 15,422 2nd quarter 3,800 12,805 3rd quarter 3,457 15,997 4th quarter 3,524 12,099 Dun's Eeview, January 8, 1910, p. 11. 25 See Chapter IX, ii, 1, above. 532 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA This result follows from a change in the relative importance of the causes which bring about failure. For years Bradstreet's has endeavored to ascertain the leading reason for every failure it records. Lack of capital and incom- petence usually account for more than half the cases, while fraud, inexperience, etc., bring up the proportion "due to the faults of those failing" to about four-fifths. In a panic, however, failures which are "not due to the faults of those failing," but to failure of others, competition, or what Bradstreet's calls "specific conditions" become, if not more numerous relatively, more important financially. Thus in the prosperous years 1905 and 1906 about a quarter of the defaulted liabilities were ascribed to causes beyond the control of the failing firms, while in 1907 this proportion increased to more than one-half, and in 1908 remained above one-third.^° During a panic a considerable number of large concerns, furnished with adequate capital and well managed, are among the victims of these unfortunate conjunctures, and it is primarily their fall which swells the average liabilities. On commodity prices panic has a sharply depressing influence. It was brought out in the closing section of Chapter XI that several groups of com- modities had passed their maximum prices several months before the panic of 1907 began. Raw mineral products began to decline after February, raw forest products after April, 20 miscellaneous raw materials after May, and goods manufactured from them after June. June also marked the turning point for all the producers' goods for which we have data. On the other hand, raw animal and farm products, especially subject to seasonal influences, rose after midsummer to maxima in October." Consumers' goods also rose until October and did not begin to decline until December, while the retail prices of foods rose slightly during the panic itself. Thus, upon most classes of wholesale prices the influence of the panic was limited to accelerating a fall already in progress, or to diminishing the effect of seasonal conditions which tended toward an advance. It is probable, how- 26 Though it is difficult to discover and classify the causes of all bankruptcies, Bradstreet's figures possess great interest as a pioneering effort in an important field of enquiry. Eearranged for the sake of greater convenience, the data for 1904-08 are as follows: Percentage of Number of Failures Faults of those failing 1908 1907 1906 1905 1904 Lack of capital 34.2 37.1 35.9 33.4 32.2 Incompetence 21.6 22.6 22.3 24.4 23.1 Fraud 11.5 10.1 10.0 9.2 8.6 Inexperience 4.0 4.9 4.9 4.8 5.1 Unwise credits 2.0 2.3 2.6 3.5 3.4 Neglect 2.2 2.5 2.2 2.9 3.1 Extravagance 1.0 .9 1.0 1.1 .8 Speculation 1.0 .7 .8 .7 .8 Total 77.5 81.1 79.7 80.0 77.1 Not faults of those failing Specific conditions 18.9 16.3 17.3 16.3 19.1 Failure of others 1.8 1.4 2.0 2.2 2.5 Competition 1.8 1.2 1.0 1.5 1.3 Total 22.5 18.9 20.3 20.0 22.9 38.0 55.4 27.1 20.9 31.9 27 For animal products, however, this maximum was less than that of the preceding February. Percen tage of Liabilities 1908 1907 1906 1905 1904 27.2 18.4 30.9 33.0 32.0 16.0 8.9 15.5 21.6 14.1 6.9 5.1 16.2 8.2 6.4 1.8 3.2 2.2 2.1 3.2 3.7 3.1 2.1 4.2 4.8 .8 .5 1.5 1.1 1.6 .9 .5 .9 1.2 .7 4.7 4.9 3.6 7.7 5.3 62.0 44.6 72.9 79.1 68.1 31.3 51.7 17.9 15.5 22.7 5.0 3.3 8.8 4.5 8.2 1.7 .4 .4 .9 1.0 MITCHELL: BUSINESS CYCLES 533 TABLE 140 Eelativi; Prices op Commodities in 1907 and 1908. By Months Prices at Wholesale in the United States ' ■ * , _ . ., „ Eaw materials 145 Brad- Eng- Betail Con- Pro- Eaw Manu- , K ^ Com- street's land prices Burners' ducers' ma- factured Min- modi- index Sauer- of foods goods goods terials articles eral Forest Animal Farm ties No. heck ^gg^ (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) January 120 116 140 144 130 146 170 145 124 127 8.9 80 February 120 117 142 147 131 148 171 145 127 129 9.0 81 March 119 117 143 147 133 146 174 136 131 129 9.1 80 April 119 115 143 146 134 143 177 133 127 129 9.0 81 May 119 116 144 149 135 144 174 131 134 130 8.9 8S June 119 116 144 148 136 143 171 130 138 130 9.0 82 July 120 117 142 146 135 141 170 131 134 130 9.0 81 August 120 120 141 144 132 137 170 135 131 130 8.9 79 September 122 122 141 148 134 134 168 137 135 131 8.8 79 October 123 125 138 148 134 131 164 142 141 13S 8.9 79 November 123 1S5 134 139 133 128 162 136 135 129 8.7 77 December 1S4 123 130 135 129 122 153 130 135 126 8.5 76 1908 January 120 128 136 129 120 151 125 136 124 8.3 76 February 118 128 131 128 119 153 120 134 123 8.1 75 March 118 127 134 127 120 151 120 136 122 8.0 74 April 117 127 133 127 119 154 122 134 122 8.1 74 May 115 123 132 125 118 153 119 136 121 8.0 74 June 114 123 129 123 116 148 121 136 119 7.7 73 July 115 124 131 122 116 148 128 137 120 7.8 73 August 114 124 135 121 118 146 131 135 120 7.9 72 September 113 123 135 122 117 146 136 129 119 7.9 73 October 113 124 133 121 118 151 140 130 120 8.0 72 November 113 125 134 121 120 153 144 128 120 8.1 72 December 115 126 136 123 121 157 147 129 121 8.2 72 Column (1) is from the Bulletin of the Bureau of Lahour, Julv, 1908, p. 187 — "simple average"; columns (2) and (3) are from Table 4 above; columns (4) and (5) are from Table 5 above; columns (6), (7), (8), and (9) from Table 7; column (10) from the materials used in making Table 7 — "grand totals" of all commodities raw and manufactured; column (11) from BradstreeVs, and column (12) from the Journcd of the Boyai statistical Society. ever, that the recorded quotations from which the index numbers are computed fail to show the full severity of the reaction in commodity markets. For there are broad hints in the contemporary issues of the financial periodicals that heavy reductions from list prices were quietly made in private negotiations by overstocked houses, as one means of raising money."" 28 The changes in the general index numbers which include many commodities of different classes are less illuminating than these detailed figures. For the points of time which such series as those published by the Bureau of Labor, Sradstreet's, and Sauerbeck mark as the beginning of recession clearly depend upon the proportionate representation allowed to consumers' and producers' goods, to manufactured articles and raw materials, and to the raw products of the mines, forests, and farms. Thus the Bureau of Labor's index number puts the maximum price in October, 1907, and Bradstreet's index number in March, primarily because the former includes relatively more manufactured goods than the latter. 534 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA The total volume of general business continued to increase slowly for some time after the recession of wholesale prices had begun. Such at least is the conclusion suggested by the statistics of bank clearings given in the next three tables. Owing to the influence of seasonal factors upon the clearings, the comparisons made between corresponding periods in 1907 and 1906 possess more significance than comparisons between successive months or weeks of 1907. So far as New York is concerned, clearings in 1907 ran steadily behind the records of 3 906 except in March and July. But most, if not all, of the decline was due to dullness upon the Stock Exchange.^" It is impossible, however, to segregate the clearings which originate in the sales of stocks and bonds from those which originate in other transactions, so that we cannot be certain that the volume of general business in New York was less before the panic in 1907 than it was in the preceding year of high prosperity.^" Outside of New York, it was certainly greater in every month of the year until November, if the clearings may be trusted as an index. But after midsummer the gains were considerably smaller than they had been in April to July, and probably would have turned presently into moderate losses, even had the crisis not become a panic. TABLE 141 Bank Cleakings in New York AND Outside or ' New In New York By months millionB of dollars Outside New York A 1906 1907 1906 1907 January 11,239 9,638 5,095 5,383 February 8,324 7,332 4,153 4,461 March 8,377 9,562 4,630 5,063 April 8,543 7,668 4,359 4,969 May 8,793 7,335 4,444 5047 June 7,816 6,369 4,433 4,767 July 7,256 7,312 4,392 5,037 August 8,834 6,891 4,310 4,637 September 8,314 6,030 4,199 4,522 October 9,344 8,196 5,206 5,584 November 8,608 5,500 5,048 4,159 December 9,227 5,350 5,058 4,057 Compiled from the Financial Review. 1907 compared with 1906 Gain ( + ) New York or loss ( — ) Outside New York —1,601 + 288 — 992 + 308 +1,185 + 433 — 875 + 610 —1,458 + 603 —1,447 + 334 + 56 + 645 —1,943 + 327 —2,284 + 323 —1,148 + 378 —3,108 — 889 —3,877 —1,001 =9 The exceptional gain of clearings in March enforces this opinion; for this was the only month in the year when the number of shares sold in 1907 was greater than in 1906. See the table in the Financial Bevieir, 1908, p. 35. 30 The slight excess of the July clearings in 1907 occurred in the face of a decline in the number of shares sold from 16.3 to 12.8 millions. MITCHELL: BUSINESS CYCLES 535 TABLE 142 Bank Cleaeings in Vabious Cities during the Panic of 1907 In millions of dollars Weeks ending October 3 New York $ 1724 Outside New York $ 1176 Chicago $ 259 Boston $ 159 Philadelphia $ 149 St. Louis $ 64.5 Pittsburg $ 55.6 San Francisco 45.0 Baltimore $ 31.2 10 1580 1141 249 144 130 67.7 50.0 44.3 32.8 17 1778 1257 271 172 152 76.2 52.3 47.3 29.6 24 1948 1247 265 171 151 73.2 55.3 43.7 32.8 31 1846 1176 244 178 152 61.5 52.7 40.6 31.7 November 7 1357 1029 208 138 122 55.9 46.9 26.4 14 1373 994 200 138 125 55.5 51.9 30.9 29.0 21 1316 970 198 137 118 57.8. 49.6 28.0 28.0 28 981 749 153 94 95 45.1 44.8 20.6 20.5 December 5 1455 1017 205 131 139 60.5 55.2 30.3 27.3 12 1320 952 191 125 110 58.8 47.6 29.2 26.3 19 1243 951 191 124 117 58.0 45.3 31.2 26.0 26 1031 792 166 100 95 50.2 42.0 24.5 20.0 January 2 1062 844 168 131 103 53.1 43.5 26.0 19.7 9 1545 1071 213 152 131 65.5 48.4 32.6 28.3 16 1674 1055 216 168 122 61.7 42.8 34.4 26.2 23 1664 1054 229 161 123 62.8 44.9 35.1 25.5 30 1345 942 214 132 104 57.1 44.8 33.3 24.3 October 3 Kansas • City $ 37.7 Cincinnati $ 26.4 New Orleans $ 17.7 Minneapolis 29.9 Cleveland $ 19.8 Detroit $ 14.5 Louisville $ 14.1 Los Angeles $ 10.4 Omaha $ 11.6 10 39.9 25.8 17.7 32.4 17.2 13.0 13.1 11.2 12.9 17 39.6 27.5 19.0 36.9 20.3 14.9 13.9 12.9 13.5 24 '40.9 27.5 20.4 36.0 17.7 14.8 13.4 11.2 12.7 31 39.5 24.6 19.6 29.2 17.4 14.3 14.4 9.0 13.7 November 7 34.5 23.5 18.4 24.8 15.9 14.0 11.5 9.7 10.2 14 31.1 21.3 18.7 22.5 16.7 13.2 10.2 9.2 10.4 21 29.2 21.7 19.5 23.2 15.9 14.2 9.1 8.7 10.5 28 23.6 16.8 15.5 19.4 12.2 10.7 7.1 6.1 8.3 December 5 26.7 22.6 22.9 26.5 15.4 12.7 10.7 7.3 10.3 12 29.2 20.7 21.6 25.3 15.0 13.9 8.9 9.9 10.7 19 31.1 21.9 23.2 24.2 15.3 13.6 9.0 7.2 10.5 26 25.7 17.9 19.8 19.6 13.0 10.7 7.6 5.8 . 9.4 January 2 25.5 19.9 20.7 19.5 12.7 11.1 8.1 6.4 8.5 9 33.1 29.8 20.9 23.4 18.6 14.1 11.6 8.9 11.3 16 34.9 27.0 22.2 22.9 16.1 13.2 11.8 9.6 12.9 23 34.9 25.2 22.7 20.9 17.4 13.9 11.7 9.4 11.7 30 32.7 24.1 18.1 18.6 14.7 11.3 11.0 7.6 11.0 Compiled from Bradstreet's. 536 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 143 Per Cent op Increase (+) or Decrease ( — ) of Bank 1907 in comparison with the Clearings or Clearings in Various Cities during the Panic of coreespokding weeks in the preceding year Weel^s ending October 3 New York % —24.8 Outside New York % + 4.2 Chicago % +16.2 Boston % — 6.5 Philadelphia % —12.2 St. Louis % + 14.3 Pittsburg % + 1.3 San Francisco % — 8.4 Baltimore % + 8.2 10 —21.3 + 3.6 +14.7 —17.4 — 4.5 +14.2 + 6.6 + 1.4 + 13.5 17 —17.8 + 5.6 +20.2 —11.0 — 8.6 +21.9 + 8.8 + 3.3 — 2.5 24 — 7.7 +12.6 +20.1 — 3.0 + 1.9 +22.3 + 7.9 — 2.2 +21.2 31 + .7 + 8.5 +13.8 + 9.7 + 1.0 + 6.0 + 2.2 —14.8 + 8.2 November 7 —24.9 — 6.1 — 3.0 —13.3 —14.7 + -1 + 1.7 14 —35.1 —19.0 —15.3 —21.2 —22.0 —18.0 — 1.8 —82.4 — 8.3 21 —42.3 —19.9 —18.6 —26.9 —25.8 —13.4 — 5.8 -^8.1 —10.2 28 —39.7 —20.6 —18.9 —30.6 —27.7 —16.6 — .8 —48.7 —15.7 December 5 —37.5 —21.3 —22.7 —29.5 —23.2 —10.6 — 4.6 — 46.6 —19.0 12 —38.9 —18.1 —14.4 —26.0 —27.7 —11.3 —12.0 —36.6 —14.7 19 —48.2 —20.0 —20.3 —30.9 —26.0 — 9.6 —11.2 —30.8 —19.8 26 —43.0 —20.2 —17.9 —28.3 —29.1 — 8.5 —14.7 —35.4 —24.8 January 2 —48.1 —25.0 —25.8 —33.2 —13.2 —16.9 —41.7 —34.6 9 —31.1 —13.4 —10.7 —23.7 —17.0 — 3.9 —12.7 —28.0 —10.6 16 —23.7 —15.6 — 9.2 —29.7 —17.7 —10.9 —19.0 —26.4 —15.8 23 —25.2 — 8.3 — .7 —17.7 —14.4 — 3.1 —18.1 —25.3 —11.4 30 —28.0 —13.1 — 6.2 —18.6 —28.5 — 1.3 —18.8 —26.4 —17.1 October 3 Kansas City % +36.8 Cincinnati '/« + 1.7 New Orleans % —13.7 Minneapolis % +12.4 Cleveland % + 9.6 Detroit % +10.1 Louisville % + 9.2 Los Angeles % —12.0 Omaha % +10.9 10 +37.9 + 5.7 —28.5 +19.5 + 1.1 + 5.6 + 7.3 — 2.1 +13.0 17 +26.4 — 4.5 —17.6 +24.4 + 2.9 + 6.6 + 7.1 +10.1 +18.3 24 +36.7 +10.8 —16.6 +45.1 +14.6 +26.4 + 8.6 + 1.0 +25.9 31 +36.8 — 2.1 — 6.0 +29.9 — 7.2 +20.9 +11.2 — 9.6 +39.5 November 7 +20.7 —15.9 —32.1 — 8.0 — 4.6 +15.6 — 9.7 —17.1 + 3.2 14 — 1.0 —16.7 —30.9 —19.9 —13.9 —34.1 —23.8 —35.6 + 3.8 21 + .6 —22.1 —29.8 + .6 — 9.2 —40.5 —25.3 —30.9 + .1 28 + 2.0 —18.8 —31.4 — 2.0 — 7.5 —10.5 —25.0 —44.9 + 1.5 December 5 —14.8 —19.8 —24.0 — 4.8 —14.3 —14.9 —22.2 —45.8 — 6.0 12 — 5.7 —19.5 —22.1 + 2.9 —11.5 — 5.8 —33.9 —22.2 — 2.9 19 + .4 —17.7 —16.8 + 7.5 —20.5 — 9.2 —34.0 —47.9 —12.0 26 — 5.1 —19.3 —10.7 — 4.6 —15.2 —11.5 —31.3 —40.0 + .8 January 2 — 5.4 —20.2 —11.9 + 1.4 —32.9 —15.9 —36.5 —42.2 —10.0 9 — 1.1 — 6.9 —20.4 +11.9 — 7.2 — 4.9 —25.9 —32.9 + 6.1 16 + 4.4 —21.0 —16.6 +27.4 —14.2 —10.2 —22.3 —35.1 +18.4 23 + 10.8 — 7.8 — 4.0 +24.4 +10.4 + 2.6 — 8.5 —25.1 +17.1 30 +15.0 —10.5 —20.6 +21.5 —10.7 — 5.3 — 7.2 —36.7 +10.9 Compiled from Bradstreet's. MITCHELL: BUSINESS CYCLES 537 The detailed figures by weeks show that, just before the panic, Boston, Philadelphia, and New Orleans were running steadily behind their records of a year before, and that San Francisco and Los Angeles were barely keeping even. But the middle-western towns were still making gains sufficient to keep the totals for the country outside of New York above the totals of 1906. The first efEect of the panic in the great business centers of the East was to increase the volume of financial transactions, such as the sale of securities by embarrassed banks and individuals, the shifting of loans, etc. These trans- actions availed to put the clearings even of New York, Boston, and Phila- delphia temporarily above the records of 1906. But business of more ordinary kinds was restricted with such promptness that the special panic operations cut little figure in the totals after the end of October. The eastern cities which had been running behind before the panic now showed losses of a quarter, a third, or even a half in comparison with the corresponding weeks of the year before. Still more surprising is the speed with which the trouble spread from New York to the Gulf and to the Pacific. The very first week of the panic showed lessened gains over 1906 or actual losses in a majority of the towns. From the third week of the panic to the end of the year the restriction of business, measured from the level of 1906, averaged about 20 per cent outside of New York and about 40 per cent in New York. Among the leading towns, Kansas City, Minneapolis, and Omaha fared least badly — perhaps because their industries are so largely concerned with foodstuffs. In general, the industrial sections of the east lost more heavily than the agricultural sections of the middle west ; for the harvests were on the whole profitable to American farmers. Notes in the business periodicals show clear h^ how this restriction in the volume of business was brought about. At the first hint of trouble from the banks, merchants began to limit their purchases. "Hand-to-mouth" buying became the order of the day. Wholesale dealers and manufacturers received telegrams cancelling orders already placed or asking for deferred deliveries. Other concerns found that they could not secure the specifications necessary for making up goods ordered on contracts. On the other hand, sellers often hesitated to ship goods, fearing lest the consignees should prove unable to pay. Not a few houses withdrew commercial travelers already in the field, and stopped soliciting orders for a time. Here and there inability to secure money for payrolls caused a temporary stoppage of work. Such interruptions of the usual course of wholesale trade and manufac- turing, with their reactions upon transportation, mining, and the like, became epidemic in the first fortnight of the panic. But retail trade continued to be reported ''fair" for several weeks, especially in the middle west. No doubt the approach of the Christmas shopping season and of cold weather was largely responsible for sustaining the business of shopkeepers in 1907. But the same phenomenon was remarked upon in 1893, when the panic occurred in summer. 538 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA Eetail trade, in fact, seems not to be curtailed seriously outside of the largest cities until a panic has closed many industrial enterprises, put others on short time, and led to the widespread discharge of wage-earners. Then, of course, the shopkeeper sees his sales fall off, as the wholesale merchant and manufac- turer had several weeks earlier. III. A Ttpioai, Crisis — England, 1907 Since our example of a panic is taken from American experience in 1907, our example of a crisis had best be taken from the simultaneous experience of England. 1. The Beginning of Reaction Definite signs that the business "boom" had passed its zenith appeared in England as early as midsummer, ]907, several months, that is, before the American panic occurred. Among the symptoms of reaction which called forth contemporary comment were the following. British railway stocks fell in the first half of 1907 with- out any apparent reason save that investors were holding aloof." A series of high-grade loans failed to find subscribers. The Bristol corporation, the Mid- dlesex County Council, the East Indian Railway, and finally the Manchurian Railways, supported by an unconditional guarantee from the Japanese govern- ment, tried one after another to raise money and were "more or less cold- shouldered by the public.'"^ While the shipbuilding yards were kept busy most of the year executing orders received in 1906 or even in 1905, their out- look for the future was dismal, since few new contracts were in sight.'^ The iron and steel trades were in a similar position. Though the mills were working at high tension for the moment, and though stocks of pig-iron were very low, the price of "Cleveland warrants" began falling in July, since both domestic and foreign demand for future delivery was declining.^* Indeed, manufac- turers were not anxious to take new business at the ruling quotations, because of the high cost of production. The Economist explained that the price of coal was ' ' a crushing tax on present and prospective industry, ' "' and that producers of iron were practically trading at a loss in executing orders booked at a time when materials and fuel were much cheaper.^" The building trades also were 31 See the London Mconomist, vol. 65, pp. 1144, 1192, 1328. 32 Ihid., p. 1284. The failure of the Manchurian railway loan attracted especial attention because of the attractiveness of the terms offered — interest 5 per cent, subscription price 97, amount of issue £4,000,000. The underwriters included some of the strongest British banks, and the guarantee of principal and interest by the Japanese government seemed to afford good security. 33 lUd., p. 1261. Si Ibid., pp. 1138-1139. 35 Ibid., p. 1583. 3S Ibid., p. 1502. MITCHELL: BUSINESS CYCLES 539 dull in almost all sections of the country." Among the railways, gross receipts grew steadily, but operating expenses grew faster, so that the ratio of net to gross receipts declined.'' Sauerbeck's index number of prices at wholesale reached its summit in May, and fell in every subsequent month. After July town clearings in London ran in most weeks below the records of 1906. Imports began to show diminishing gains after April. Perhaps most significant of all the signs of reaction, the percentage of unemployment, which in every month since March, 1905, had been less than in the corresponding month of the year before, began in July, 1907, to run steadily higher than in 1906." By midsummer of 1907, then, the tide of British business began to recede, because prosperity had bred the stresses described in Chapter XI. But it was only in the markets and the industries most sensitive to coming events that the change was noticed. The current volume of business outside of the financial markets showed no slackening ; for railways receipts continued to grow, country clearings in London and clearings in most of the provincial towns continued to exceed the high records of 1906, and exports showed no falling off in their rate of gain". Nevertheless, the difficulties already present on the stock exchange and in the bond market, and definitely foreshadowed in shipbuilding, the iron trade, and the labor market were certain to extend in a short time over the whole field of business. The more acute difficulties experienced in foreign countries, then, did not cause the British crisis of 1907 — they did no more than hasten its development and make it more severe. 2.- The Effect of Foreign Crises London's position as the world's free market for gold exposes British busi- ness in an exceptional degree to disturbance from financial troubles in other countries; and the exceptionally high ratio of foreign commerce to domestic trade in Britain makes her business exceptionally sensitive to depression among her customers. The year 1907 brought severe stresses from the first source, the year 1908 from the second. Egypt had a serious crisis in the spring of 1907, South Africa in the late summer and early autumn, Holland in the first half of October, the United States and Hamburg in the second half, Portugal in November, and Chile in December." Each of these disasters produced some effect upon the delicate 3T The Economist's "Commercial History and Keview of 1907," p. 1. 38 Economist, vol. 65, p. 1499. 39 Tables relating to clearings, imports, and unemployment are given on a later page. 40 In England as in America the metropolitan clearings are a less faithful guide to the volume of business than country clearings. Even the town clearings in London show no decline if the figures for stock-exchange pay days and consols settling days be excluded. See. the £«onoms<." Commercial History and Review of 1907 " p 3: for statistics of clearings and exports see Tables 147, 148, and 149. 41 Economist, vol. 65, pp. 1138, 1583, 1755-56, 1814-15, 1977, 2083-84, and 2171. 540 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA mechanism of the London money market and later upon the demand for British products. Incomparably greatest among these effects, however, was that produced by the panic in New York. The first consequence of the crash in America was the fall of "Yankee rails" on the London stock market. No large failures followed ; indeed, dealers were said to be pleased by what they described as the emancipation of the home and foreign markets from "American bondage."*^ The second consequence, with- drawals of gold from the Bank of England for export to New York, had more serious results. On October 16th the Bank of England had a reserve of $116,000,000, equal to 49% of its deposit liabilities to the banks and the public. Meanwhile its loans made 63.6% of deposits. In both respects the bank was stronger than usual; for the averages of these ratios in 1900-09 were 46.8 and 70.0 per cent respectively." The bank rate had stood since the middle of August at the moderately high level of 4^ per cent, and the market rate for 60-day bills was 4.13 per cent. In all respects the bank had the situation well in hand. The first heavy withdrawals of gold were made in the week ending November 2— $33,436,000." In the next two months $97,700,000 in gold was exported from England.*"^ Meanwhile, since the holiday shopping season was approaching, the domestic withdrawals of currency from the bank exceeded the deposits in most weeks." To meet this enormous drain, the Bank of England advanced its dis- count rate from 41;^ to 5y2% on October 31st, to 6% on November 4th, and to 7% on the 7th. It also secured some $15,000,000 in American eagles from the Bank of France early in November," and induced the India Council to release into the bank's general fund about $7,500,000 of gold that had been "ear- marked."" These measures proved amply sufficient. Between October 23rd and November 6th the reserve fell $31,000,000 ; next week the gold from France was largely instrumental in raising it by $17,000,000; another decline of $6,000,000 followed ; but thereafter gold began to flow into England freely and by December 11th the reserve stood again at $115,000,000, equal to 47 per cent of the deposits. The usual end-of-the-year settlements caused a new drop of the reserve after the middle of December, so that the ratio stood at 36 per cent on January 1st ; but the managers knew that the strain was passed and reduced the bank rate to 6 per cent on the 2nd, and to 5 per cent on the 16th. Meanwhile the reserve had mounted to sums larger both absolutely and in proportion to deposits than before the American panic began. ■12 Ihid., pp. 1840, 43 See the tables relating to the Bank of England in Chapter VII, v. ** See the money article of the Economist, October 26th and November 2d. •15 See Table 146. ■to See the weekly money article of the lSco)iomist in November and December. ■''' The latter institution- received in return long dated bills at 4% per cent discount, charged 1-0/00 prem- ium for the gold, and stipulated that the reimbursement should be in sovereigns. See the Prench correspond- ence of the Economist, November 9th. 48 See the money articles of the Economist for November 30th, and December 14th and 21st. MITCHELL: BUSINESS CYCLES 541 TABLE 144 Weekly Returns op the Banking Depaktment August 7, 1907, to January In millions of dollars OF THE Bank of England. 29, 1908 1907 Capital and rest Public deposits Other deposits and seven-day bills Govern- ment securities Other securities in banking department Reserve notes and specie Per cent of reserve to deposits Per cent of loans to other deposits August 7 88 31 214 78 140 115 47% 65.4% 14 88 32 208 71 136 121 50 65.4 21 88 37 226 71 153 127 48 67.7 28 88 37 228 71 151 131 49 66.2 September 4 89 31 233 70 151 132 50 64.8 11 89 37 229 70 148 136 5i 64.6 18 89 42 229 70 150 140 52 65.5 25 89 45 221 70 149 136 51 67.4 October 2 89 42 213 70 150 125 49 70.4 9 86 32 220 77 144 117 47 65.5 16 86 26 209 72 133 116 49 63.6 23 86 34 213 72 145 117 47 68.1 ■30 87 35 219 70 170 101 40 77.6 November 6 87 33 212 70 - 176 86 35 83.0 13 87 34 220 70 168 103 40 76.4 20 87 38 212 70 170 97 39 80.2 27 87 38 210 70 159 106 43 75.7 December 4 87 27 216 70 153 107 44 70.8 11 87 26 219 70 147 115 47 67.1 18 87 25 212 70 145 109 46 68.4 25 87 27 212 70 161 96 40 75.9 1908 January 1 87 37 256 77 199 104 36 77.7 8 87 26 220 79 135 118 48 61.4 15 88 22 217 70 131 126 53 60.4 22 88 33 211 70 128 134 55 60.7 29 88 43 205 70 126 141 57 61.5 Compiled from Statistics for Great Britain, Germany, and, France 1867-1909 (Publications of the National Monetary Com- aission.) Pp. 120, 121. The ratio of loans to deposits is computed from the 3rd and 5th columns of the table. 542 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA . TABLE 145 London Rates of Discount, by Weeks, August, 1907, TO January, 1908 Bank rate % 4.00 Discount rates Call money % 2.75 Deposit allowances 1907 August 2 60-day bills % 3.56 6-months* bills % 4.19 Discount Banks houses % % 2.50 2.75 9 4.00 3.94 4.44 2.00 2.50 2.75 16 4.50 4.50 5.00 3.00 3.00 3.25 23 4.50 4.63 5.19 2.50 3.00 3.25 30 4.50 4.19 4.88 2.50 3.00 3.25 September 6 4.50 3.94 4.69 2.13 3.00 3.25 13 4.50 3.81 4.38 2.25 3.00 3.25 20 4.50 3.69 4.13 1.75 3.00 3.25 27 4.50 3.69 4.25 3.63 3.00 3.25 October 4 4.50 3.88 4.25 3.63 3.00 3.25 Ix 4.50 3.94 4.44 2.25 3.00 3.25 18 4.50 4.13 4.44 2.88 3.00 3.25 25 4.50 4.50 4.75 3.38 3.00 3.25 November 1 5.50 5.69 5.56 4.50 4.00 4.S5 8 7.00 6.75 6.44 5.00 4.00 5.25 15 7.00 7.00 6.13 5.00 4.00 5.25 22 7.00 6.94 6.13 6.50 4.00 5.25 29 7.00 6.38 5.13 5.25 4.00 5.25 December 6 7.00 5.88 4.75 3.50 4.00 5.25 13 7.00 6.06 5.13 4.00 4.00 4.75 20 7.00 6.06 4.94 4.50 4.00 4.75 27 7.00 6.38 5.13 6.50 4.00 4.75 1908 January 3 6.00 5.00 4.63 4.88 4.00 4.25 10 6.00 4.63 4.31 4.13 4.00 4.25 17 5.00 4.31 4.06 3.63 3.50 3.75 24 4.00 3.75 '3.50 3.25 2.50 3.00 31 4.00 3.63 3.31 3.75 2.50 3.00 Compiled from Statistics for Great Britain, Germany, and France, 1867-1909. (Publications of the National Monetary Com- QJssion.) Pp. 61, 62. •' MITCHELL: BUSINESS CYCLES 543 TABLE 146 Monthly Imports and Exports OP Gold INTO AND OUT OF GkEAT BeITAIN , 1906-1908 1906 1907 In millions of dollars 190f i Net imports ( -f- ) or exports ( — ) January Imports 11.6 Exports 16.1 Imports 22.3 Exports 18.2 Imports 15.7 Exports 14.3 1906 — 4.5 1907 + 4.1 1908 + 1.4 Febuary 27.2 7.7 18.1 14.5 20.2 17.7 +19.5 + 3.6 + 2.5 March 25.9 10.1 21.4 11.3 18.5 7.0 +15.8 +10.1 + 11.5 April 13.6 28.1 17.8 8.7 27.5 16.7 —14.5 + 9.1 +10.8 May 22.2 20.4 23.9 14.1 15.8 21.6 + 1.8 + 9.-8 — 5.8 June 11.6 3.1 10.6 18.6 15.5 23.6 + 8.5 — 8.0 — 8.1 July 13.4 7.5 18.1 10.7 22.1 24.7 + 5.9 + 7.4 • — 2.6 August 21.4 4.4 19.4 8.5 14.0 18.9 +17.0 +10.9 — 4.9 September 14.3 40.6 12.7 17.0 24.1 24.7 —26.3 — 4.3 — .6 October 15.7 43.1 20.6 28.2 14.9 24.7 —27.4 — 7.6 — 9.8 November 26.7 • 10.8 55.1 74.0 13.8 25.9 +15.9 —18.9 —12.1 December 20.4 224.0 15.5 207.4 37.9 277.8 23.7 247.5 22.4 224.5 23.2 243.1 + 4.9 +14.2 — .8 Year +16.6 +30.3 —18.6 Compiled mission.) P. from Statietics . 66. for Great Britain, Germany, and France, 1887- -1909. (Publications of the National Monetary Com- This increase of the reserve after the first fortnight of the heavy withdrawals, while due partly to the $22,500,000 of gold obtained from the Bank of Prance and the India Council, and partly to the inflow of funds from the interior after the holidays, was also due in large measure to imports from other countries. In fact the imports of gold in November and December amounted to $93,000,000 — only $4,700,000 less than the exports." Never was the efficacy of an advance in the bank rate as a means of attracting gold more strikingly demonstrated. T'he Crisis in Industry and Commerce Though the Bank of England succeeded in meeting the double strain imposed by the approach of crisis at home and the call for help from New York, it was obliged to maintain the extraordinarily high discount rate of 7 per cent for nearly two months. During all this time the market rate for 60-day bills averaged nearly 61/2 per cent and for 6-months bills nearly 51/9 per cent.'" While these rates were much lower than those reported in New York," they were much higher than English business was accustomed to paying. The tense condition of the money market, therefore, had a powerful effect in hastening and aggravating the crisis which had been developing slowly since midsummer. 49 Doubtless the gold received from the Bank of IVance is counted among the imports. 50 See Table 145. 51 See Table 136. 544 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA This crisis, however, proved mild and tame in comparison with the American panic. There was no hint of suspension or even of limitation of payments by the banks, and therefore no scramble for money. There was no fear that solvent borrowers with acceptable security to give would be refused bank accomodation, and therefore no needless failures and no wholesale destruction of credit. In the very fortnight when the Bank of England lost $31,000,000 of cash it increased its loans by $31,000,000. If the loans declined after November 6th, it was not because the bank was refusing to lend, but because business men were refusing to borrow at 7 per cent. On the Stock Exchange the crisis had less effect than might have been expected, largely because of a fortunate coincidence. In September the Execu- tive Council of the Amalgamated Society of Railway Servants had decided to take a ballot upon the advisability of calling a general strike. But Mr. Lloyd George intervened, and news that the dispute would be adjusted without a con- flict was published on the same day that the Bank of England raised its rate to 7 per cent.^^ While this good news did much to buoy up the market, never- theless November brought the lowest stock prices of the year. Recovery was prompt, however, and, if the "index niunber of stock-exchange values" compiled by the London Bankers' Magazine may be trusted, the general level of prices was higher in January than it had been in September."' Another fortunate circumstance helped to mitigate the effects of the crisis upon industry and commerce. The British farmers reaped exceptionally large harvests in 1907 and sold them for exceptionally high prices.^* While agriculture employs a much smaller proportion of the population in the United Kingdom than in the United States, still the ability of the farming classes to buy freely was an important factor in counteracting the shrinkage in the demand for com- modities from other sources. Nevertheless, the recession of activity, already under way, became more marked in the last three months of the year. In November, the Economist sought the opinions of representative firms in many branches of trade regarding the effect of "dear money" upon their busi- ness. The replies indicated that there had not as yet been any serious interrup- tion of manufacturing; but the passing of the "boom" was generally admitted. Not a few manufacturers who had been troubled by the heavy cost of production seemed to welcome the change. In particular, the high prices of raw materials had become a serious burden, and many firms had been "unable to recompense 52 Economist, vol. 65, pp. 1863, 1945. 53 This so-called index number shows the aggregate ' ' values ' ' of 387 representative issues of securities, including both stocks and bonds. The results for 1907-08 in millions of dollars are as follows: 1907— January 18,702 1907— August 17,023 February 18,571 September 17,188 March 17,962 October 17,062 April 17,972 November 16,823 May 17,792 December 17,033 June 17,461 1908— January 17,334 July 17,685 February 17,320 54 Economist, vol. 65, p. 2031, and ' ' Commercial History and Eeview of 1907, ' ' pp. 3, 4. MITCHELL: BUSINESS CYCLES 545 themselves by charging more to their customers. ' ' The most pessimistic opinions came from trades like jute and linen which depended largely upon the American market. But no serious disasters were anticipated, because manufacturers had received such a long warning of the crisis that speculation had been kept within narrow limits."'' TABLE 147 Merchandise Imports and Exports op Great Britain by months, January, 1907, to March, 1908, together with the percentage op gain ( + ) or loss ( — ) in comparison with the corresponding months op the preceding year 1907 January February March April May June July August September October November December 1908 January February March 1907 January February March April May June July August September October November December Food, drink, and tobacco j^ Per cent of gain Amount or loss 96.1 79.5 95.7 95.5 99.1 100.3 105.0 106.0 98.6 119.0 108.9 101.0 97.1 91.1 107.3 7.3 6.8 6.9 7.2 7.8 8.4 11.2 11.4 11.3 11.6 11.8 9.1 + 0.2 — 1.4 + 0.6 +10.2 + 0.1 — 2.7 + 3.4 +18.4 + 1.7 +12.4 +11.1 + 7.9 + 1.0 +14.5 +12.0 — 1.0 + 5.8 — 3.9 +12.1 + 2.4 +12.7 +22.1 +19.3 + 8.7 + 0.3 + 4.1 + 7.8 In millions of dollars Raw materials Articles and articles wholly or mainly mainly unmanufactured manufactured Amount 130. 116. 115. 112. 91, 74. 82. 71, 78. 95.; 106.' 112.1 121.5 102.2 81.4 18.9 19.0 20.1 21.1 22.6 21.9 24.8 23.7 23.6 25.7 24.4 21.9 Per cent of gain or loss Amount Imports +31.6 +32.1 + 2.9 +39.8 +12.1 + 9.7 + 14.8 + 3.5 + 0.5 + 2.8 — 1.6 + 1-1 66.4 60.1 68.6 67.5 64.5 56.6 65.9 61.3 56.8 64.9 61.5 57.9 — 7.0 54.9 —12.4 60.7 —29.5 64.0 Exports +18.9 141.8 +26.2 +13.7 +29.8 +25.0 +38.6 +30.6 +28.9 +33.3 +28.8 +35.2 +27.1 128.3 139.7 136.7 146.8 128.5 158.3 143.5 183.9 146.3 135.3 125.8 Per cent of gain or loss + 4.2 — 1.7 — 0.3 +10.7 — 5.8 — 7.1 + 5.5 — 4.8 — 1.3 — 1.3 — 3.4 — 3.6 1908 January 7.4 + 1.1 20.6 + 9.1 137.0 — 3.4 February 7.1 + 4.2 20.3 + 6.8 125.9 — 1.8 March 7.2 + 4.4 20.5 + 1.8 130.4 — 6.6 Compiled from the monthly trade supplements of the (London) Economist. Miscellaneous and unclassified Amount 1.2 1.1 .9 .9 .9 1.0 1.0 .9 1.0 .9 .9 .9 —17.5 .8 + 0.7 1.2 — 6.8 .9 +13.9 + 9.7 +10.1 +28.2 + 17.7 + 3.7 +19.9 + 8.9 +13.2 +14.3 + 5.5 + 1.0 2.7 2.0 2.2 2.4 2.4 2.3 2.6 3.2 2.3 2.9 3.0 2.6 Per cent of gain or loss — 0.9 + 5.9 —19.4 — 2.3 —12.3 +11.6 — 2.3 —18.5 +26.3 —18.4 — 4.9 + 0.6 —32.0 + 9.5 — 1.5 +35.5 +19.2 + 1.6 + 9.1 + 2.1 +18.6 — 3.7 +40.9 + 0.4 +27.5 + 2.6 — 7.5 Grand total , ' > Per cent of gain Amount or loss 294.6 257.6 281.0 276.3 256.0 232.6 254.1 239.9 220.6 280.6 278.1 272.5 274.3 255.1 253.6 170.6 156.1 169.0 167.5 179.7 161.1 196.8 181.8 171.1 186.5 174.5 159.3 2.5 — 6.8 167.4 2.2 + 9.2 155.5 1.9 —13,5 16Q.1 +13.2 +11.3 + 8.4 +20.5 + 2.1 — 0.2 + 7.4 + 0.8 + 0.6 + 5.5 + 2.5 + 2.4 — 6.8 — 0.9 — 9.7 +13.9 +11.5 + 9.7 +27.3 + 16.4 + 8.1 +20.9 +11.5 +15.1 +15.3 + 8.7 + 4.2 — 1.8 — 0.3 -= 5,3 55 Economist, vol. 65, pp. 2022, 2071-72. 546 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA TABLE 148 Clearings in London By Weeks, 1907-08 iding Town clearings Country clearings Weeks ei A Amounts in millions of dollars Gain ( + ) or loss ( — ) Per cent Amounts in millions of dollars Gain ( + ) or loss ( — ) Per cent 1907 1906 1907 1906 1907 1906 July 3 July 4 1,460 1,483 — 1.6% 105 98 + 7.1% 10 11 1,134 995 + 14.0 123 113 + 8.8 17 18 1,198 1,146 + 4.5 112 104 + 7.7 24 25 913 908 + .6 95 88 + 8.0 31 Aug, . 1 1,151 1,237 — V.O 95 88 + 8.0 Aug. 7 8 1,042 864 +20.6 96 86 +11.6 14 15 899 1,126 —20.2 101 98 + 3.1 21 22 1,111 931 +19.3 102 87 +17.2 28 29 880 907 — 3.0 84 75 +12.0 Sept. 4 Sept . 5 1,102 1,321 —16.6 93 91 + 2.2 11 12. 878 836 + 5.0 102 86 +18.6 18 19 1,007 1,244 —19.1 96 90 + 6.7 25 26 905 864 + 4.7 89 82 + 8.5 Oct. 2 Oct. 3 1,268 1,340 — 5.4 94 94 0.0 9 10 1,053 916 +15.0 124 112 +10.7 16 17 1,154 1,197 — 3.6 114 106 + 7.5 23 24 935 965 — 3.1 102 93 + 9.7 30 31 1,245 1,301 — 4.3 98 92 + 6.5 Nov. 6 Nov, , 7 1,069 1,016 + 5.2 120 105 +14.3 13 14 975 1,128 —13.6 104 93 +11.8 20 21 1,138 997 +14.1 112 99 +13.1 27 28 940 924 + 1.7 94 83 +13.2 Dec. 4 Dec. 5 1,151 1,362 —15.5 99 100 — 1.0 11 12 872 956 — 8.8 108 92 +17.4 18 19 1,1.51 1,252 — 8.1 106 99 + 7.1 24 26 834 717 +16.3 79 57 +38.6 1908 1907 1908 1907 1908 1907 Jan. 1 Jan. 2 1,096 1,518 —27.8 79 94 —16.0 8 9 1,114 1,128 — 1.2 123 113 + 8.8 15 16 1,025 1,347 —23.9 108 102 + 5.9 22 23 1,105 1,070 + 3.3 107 97 + 10.3 29 30 976 967 + .9 95 86 +10.5 Feb. 5 Feb. 6 1,287 1,430 —10.0 112 109 + 2.8 12 13 949 1,002 — 5.3 103 91 +13.2 19 20 1,127 1,265 — 6.4 90 90 0.0 26 27 915 978 —10.9 104 96 + 8.3 MITCHELL: BUSINESS CYCLES 547 TABLE 149 Provincial Clearings IN England By Weeks, 1907-08 Manchester A Liverpool Birmingham Newcastle-on-Tyne Bristol Weelis ending 1907 July 6 Amount in millions of dollars 37.1 Gain ( + ) or loss ( — ) in comparison with 1906 + 6.5% Amount in millions of dollars 24.3 Gain (+) or loss (— ) in comparison with 1906 +26.6 % t Amount in millions of dollars 9.3 Gain ( + ) or loss ( — ) in comparison with 1906 + 10.5% Amount in millions of dollars 6.2 Gain ( + ) or loss (— ) in comparison with 1906 — 3.1% Amount in millions of dollars 3.9 Gain ( + ) or loss (— ) in comparison with 1906 + 5.2% 13 30.4 + 5.4 20.7 +19.4 5.5 + 0.8 5.3 +22.3 2.9 + 0.4 20 30.9 +17.5 18.7 +41.1 5.1 + 11.0 4.6 — 1.7 2.7 + 6.5 27 27.7 + 8.0 13.8 + -2 4.8 — 2.4 5.2 — 6.4 2.8 — 3.7 Aug. 3 34.7 +14.1 19.8 +17.4 8.4 + 8.0 5.8 —11.6 3.5 + 3.6 10 28.2 +12.6 13.8 +15.1 3.6 +19.8 4.6 — 2.4 2.1 + 2.5 17 29.5 + 10.8 16.6 + 2.0 5.0 + 8.4 6.5 + 6.7 2.7 — 7.1 24 24.1 +13.8 14.5 + 3.7 3.8 . — 5.0 6.0 +13.8 2.5 0.0 31 28.6 +12.9 16.3 +13.3 4.7 —11.1 5.1 + 5.2 2.5 — 4.4 Sept. 7 31.4 +12.1 16.9 + 8.8 7.7 +27.2 5.6 + 2.6 2.9 +12.0 14 26.6 + 5.9 16.4 —0.01 4.4 + 5.1 5.1 — 4.7 2.6 + 5.8 21 26.8 + 12.1 20.2 + 56.6 4.1 — 4.3 5.4 + 2.9 2.4 — 0.1 28 27.4 — 0.5 17.2 — 5.7 4.2 —10.7 5.2 + 8.8 2,4 — 8.3 Oct. 5 38.3 + 13.1 20.4 — 3.3 8.2 +12.2 6.5 — 3.8 3.6 — 6.2 13 30.4 + 1.9 17.3 —15.2 4.8 — 1.7 4.8 — 3.6 2.8 + 0.3 ]9 30.2 +10.4 17.4 —17.3 5.2 — 6.5 4.5 —12.0 3.1 + 8.7 26 27.2 + 1.8 17.4 + 2.4 4.3 — 8.7 4.7 — 9.8 3.2 +11.6 Nov. 2 35.5 +12.1 22.4 + 8.7 7.7 — 2.8 6.1 +18.9 3.3 + 6.6 9 32.1 +19.7 16.5 +10.5 6.1 +29.2 4.9 +24.4 2.9 + 7.9 16 31.6 + 6.0 19.9 + 1.8 5.4 — 0.3 6.0 + 5.5 3.1 — 4.9 23 27.8 + 8.8 16.8 — 1.5 4.5 — 9.7 6.1 +11.7 2.8 + 2.7 30 29.9 + 2.6 20.3 + 7.1 4.7 —18.6 5.2 + 2.3 2.7 + 2.8 Dec. 7 35.8 +34.1 19.3 +13.1 7.9 + 1.9 5.9 — 6.8 3.2 — 7.6 14 30.1 + 0.7 19.9 + 2.0 4.9 — 7.9 5.7 + 3.9 2.6 — 0.9 21 29.2 + 6.7 18.8 + 5.5 5.3 —18.1 5.8 — 4.0 4.0 + 18.5 28 36.6 —14.3 16.2 — 0.6 5.3 — 1.8 6.7 +86.1 2.9 —20.8 1908 Jan. 4 23.0 — 3.6 14.2 —11.0 6.8 — 9.0 3.7 —43.0 2.8 —13.0 11 30.9 + 2.9 17.8 — 5.1 4.8 — 6.2 5.2 +12.8 3.0 0.0 18 31.9 + 2.0 21.1 — 4.7 5.1 —10.9 5.1 — 3.6 2.9 — 9.2 25 27.2 + 1.9 19.2 +12.2 4.4 —13.5 4.8 —15.3 2.8 — 3.8 Feb. 1 31.0 — 5.7 18.8 —14.1 5.8 —26.1 4.4 —14.0 3.0 —13.9 8 35.7 +17.1 19.2 + 8.2 7.1 + 9.2 4.5 —21.1 3.5 + 4.5 15 31.8 + 6.5 18.5 —11.1 5.3 — 9.6 4.2 —26.7 3.3 + 7.7 22 26.5 — 3.1 17.8 — 2.5 4,9 —12,2 4.2 —24.8 2.9 — 4.0 548 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA These views are amply confirmed by the statistical record. The dwindling gains of imports and exports over the figures of twelve months before turned after the first of the year into positive losses. Country clearings in London held out longer, but town clearings and clearings in the provincial centers of trade showed losses or diminished gains. Finally, unemployment, instead of declining after the end of the year as usual, continued to rise until the percentage was more than twice that of the year before. Thus English business, like American business, passed from a state of high prosperity in the summer of 1907 into a state of marked depression in the summer of 1908 ; but the transition was accomplished without a serious epidemic of bankruptcies and without violent interruption of the usual processes of producing and distributing goods. TABLE 150 Percentage of Trade Union Members Unemployed in the United King-dom at the End of Each Month, 1904-08 1904 1905 1906 1907 1908 January 6.1 6.3 4.3 3.9 5.8 February 5.6 5.7 4.1 3.5 6.0 March 5.5 5.2 3.4 3.2 6.4 April 5.5 5.2 3.2 2.8 7.1 May 5.8 4.7 3.1 3.0 7.4 June 5.5 4.8 3.2 3.1 7.9 July 5.6 4.7 3.1 3.2 7.9 August 5.9 4.9 3.3 3.6 8.0 September 6.3 4.8 3.3 4.1 9.3 October 6.3 4.6 3.9 4.2 9.5 November 6.5 4.3 4.0 4.5 8.7 December 7.1 4.5 4.4 5.6 9.1 Average 6.0 5.0 3.6 3.7 7.8 From the Fourteenth Abstract of Labor Statistics of the United Kingdom, 1908-09, p. 7. IV. The Close of Crises No certain dates can be assigned for the beginning or for the end of crises. For the strains which result in forced liquidation of credits accumulate slowly and the demand for settlement of outstanding credits may become widespread before the public is apprised of what is going on and before the pace of activity has sensibly abated. Further, in a large country this process of liquidation may begin at some business center, while the tide of prosperity is still rising elsewhere, and spread rather gradually to the latter places. On the other hand, the strains relax as gradually as they have gathered, and the crisis merges into depression in the same unobtrusive fashion that it emerged from prosperity. MITCHELL: BUSINESS CYCLES 549 For example, it is impossible to say precisely when the crisis of 1907 began in the United States. Stringency in the money and investment markets became severe in 1906; the stock market was in difficulties at least as early as January, 1907, and a crash occurred in March; the prices of raw mineral products began to decline after February ; complaints of the encroachment of operating expenses on profits became common in the spring ; bond issues began to find few takers about the same time ; several large industrial plants went into the hands of receivers in the summer because they could not secure loans, and restriction of construction work was frequently reported after July. In short, a crisis was brewing toward the end of 1906 and in the earlier part of 1907. But none the less the volume of general business continued to rise month by month. To say precisely when the crisis began is therefore to select some arbitrary criterion and apply it irrespective of other conditions. Panics, on the other hand, may be dated with more assurance. The suspen- sion of the Knickerbocker Trust Company on October 22nd marks the beginning of the panic of 1907, and with less definiteness the crash of industrial stocks and the bank failures of May mark the beginning of the panic of 1893. The ending of a crisis, whether accompanied by panic or not, is the cessation of the intense demand for prompt liquidation. Where the banks have been able to satisfy the needs both for currency and for deposit credits, solvent debtors gradually meet their obligations as they mature, and the insolvent debtors fail and pass from the management of business enterprises. There are losses to be written off, but confidence in the safety of the remaining credits is restored. Meanwhile but little borrowing is done to finance new business ventures, and that little is done upon a broad margin of security to the lender and on exceedingly conservative estimates of profit to the borrower. Interest rates relax, and money accmnulates in the banks. In short, the crisis ends because the members of the business community have withstood, on the whole successfully, the test of ability to meet their financial obligations. When a panic has occurred, with a restriction of payments, a scramble for money, contraction of loans, heavy failures, etc., the process of recuperation is slower but possesses the same general character. Despite the intense stress of the demand for money, the percentage of failures to the whole number of firms in business is very small. According to Bradstreet's this percentage was 1.46 in 1893, .70 in 1907, and .94 in 1908. Bun's Revietv gives 1.28 per cent in 1893, .82 per cent in 1907, and 1.08 per cent in 1908. The great majority of enterprises reassure their sceptical creditors by actually paying, or proving their ability presently to pay, what they owe. Meanwhile the importation of gold, the increase in bank-notes, and the issue of substitutes for money gradually relieves the worst of the monetary stringency. Just so soon as banks become able and willing to pay in cash, hoarding ceases, and money locked up in deposit boxes comes back into circulation. Presently the banks find themselves with a super- 550 MEMOIRS OP THE UNIVERSITY OF CALIFORNIA fluity of cash and reduce interest rates. The restriction in the volume of business brings with it a meagre demand for credit, while borrowing to meet maturing debts declines. There may remain much anxiety concerning the collection of old accounts, the number of failures may remain large or even increase; but the inability to borrow on good security is a thing of the past. The acute stage of the liquidation — the crisis — is over, and depression — the dragging stage of the liq nidation — begins. V. The Prevention of Panics Experience supports the curi-ent belief that occasional crises are inevitable in communities where economic organization has developed into the full-blown money economy and where knowledge concerning the workings of the money economy is imperfect. Just as definitely, experience supports the belief that crises can be prevented from degenerating into panics. The distinction between these two states of business is a matter of degree, but in this case matters of degree have grave importance. To save solvent firms from failing for lack of loans they can repay, to save capable managers from being forced to part with the control of properties they are developing effectively, to save employers from having to discharge men because banks will not furnish money for payrolls, — in short to prevent the more violent manifestations of business confusion from occurring — is a service of great value to a country. The American panics of 1893 and 1907 were ushered in by a series of heavy failures. But the downfall of the Comptoir d'Escompte in 1889 in France, of Barings in 1890 in England, and of the Bank of Leipzig in 1901 in Germany were no less alarming than the failure of the Knickerbocker Trust Company in 1907 in America. Had the former failures occurred in the United States, panics would have followed; had the latter failure occurred in England, France, or Grermany, there would have been no panic. For in any of these European countries the shock to confidence would have been allayed by the prompt intervention of the other banks. A syndicate of the strongest financial institutions in the country would have taken charge of the embarrassed concern and guaranteed payment to its depositors. More impor- tant still, the central bank would have taken the lead in a policy of lending freely to all necessitous business men who could provide adequate security for repay- ment. Most important of all, a restriction of payments on the part of the leading banks would not have been made — it would not even have been feared. Failures would not have been avoided, for enterprises which had become insolvent through mismanagement or misfortune would have gone into the hands of receivers; but the bankruptcies would not have been swelled by the inability of solvent concerns to secure bank accommodation. Interest rates would have risen, but Banks of New York reserves Oct. 12 $261 millions Nov. 23 216 Jan. 11 269 Oct. 12 100% Nov. 23 83 Jan. 11 103 MITCHELL: BUSINESS CYCLES 551 not to 10 and 12 per cent, and commercial paper would not have become unsale- able. The process of liquidation would have proceeded with its concomitant decline in prices and volume of trade; but the transition from prosperity to depression would have been far less violent. The difference in efficiency for purposes of withstanding strain between the American and the English banking organization and banking practice, stands out with startling clearness from the following figures concerning bank reserves. Bank of England Actual amounts: reserve Before the panic Oct. 9 $117 millions Lowest point Nov. 6 86 After the panic Jan. 8 118 Belative amounts: Before the panic Oct. 9 100% Lowest point Nov. 6 74 After the panic Jan. 8 101 American importations of .gold from London actually caused a greater relative fall in the Bank of England reserve than occurred in the combined reserves of the New York clearing-house banks. Yet no one feared for a moment that the great British bank would hesitate to honor in full all legitimate demands made upon it from home or abroad, while the New York, banks advertised their weak- ness by restricting payments almost at the outset of the strain. The crucial importance of the policy followed by the leading banks in deter- mining whether a crisis shall become a panic arises from the fact that the banks are the chief source of short-time loans and the chief organs for increasing the currency on short notice. Since a crisis occasions a liquidation of outstanding credits, the imperative need of the time is for sufficient bank accommodation to enable solvent debtors to meet the demands made upon them for payment. If the banks can inspire the community with confidence in their ability to satisfy this need, the process of liquidation can be carried through with a minimum of loss and confusion. Defects both of banking law and banking practice, therefore, may fairly be held responsible for the degeneration of American crises into panics. The legis- lation which prevents any but national banks from issuing notes and which requires the latter institutions to deposit government bonds as security prevents a rapid increase of the currency at the moment when it would be most effective in checking an incipient panic." But the need would not be fully met even by the most elastic system of bank-note issue. For the majority of business enter- prises require deposit credits rather than money to meet their accruing obliga- 56 Whether the provisions for the issue of emergency currency made by the Aldrich-Vreeland Act, passed after the panic of 1907, afford an adequate remedy for this long-standing defect in the American currency system cannot be told until the new machinery has been tested in practice. And this law seems likely to expire by limitation before occasion has arisen for its application. 552 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA tions. Elasticity of lending power is needed more than elasticity of currency. At present American banks in the country districts, and still more American banks in the reserve and central-reserve cities, make a practice in good times of keeping reserves but little above the minimum required by lav^. Indeed, the end of a prosperous period commonly finds the great majority of city banks with reserves barely above or just under the limit." These reserves are not small; indeed, they are larger in proportion to deposits than the reserves, carried in other countries which avoid panics."^ But there is no adequate machinery in the American system of thousands of small, independent banks for putting the available funds where they are most needed. Each institution in country dis- tricts must fend for itself, and many banks not threatened keep idle in their vaults money which under a higher type of organization might be used effec- tively to calm uneasiness and avert disaster in other places. In the towns, the issue of clearing-house loan certificates does something toward enabling the banks to co-operate with each other. But, in recent' panics, this measiu-e has been shorn of one of its original elements — the equalization of reserves among the banks by assessments levied upon institutions which have more money than they require and the distribution of the proceeds among the institutions whose reserves are running low."" As matters stand now, the clearing-house loan cer- tificate does enable city banks to keep all their cash for the use of their depositors and correspondents, instead of using a large proportion for the payment of clearing-house balances. But it does not enable the bank which has heavy demands for currency from country banks or from local customers to obtain funds from its neighbors. Thus, even in the reserve and central-reserve cities, the available money is prevented from flowing to the places where it is most needed. Of course this fact renders more difficult the avoidance of restrictions upon payments. The banks most exposed to demands for money — that is, the city banks which make a specialty of soliciting deposits from country institu- tions — are tempted to restrict their remittances early in any season of strain, because they cannot count definitely upon support from their neighbors."" Granting that much of the difficulty of meeting the strains imposed upon banks by crises arises from the lack of organic inter-relations among the institu- tions, we still have to admit that the American banks have made a fetish of the reserve requirements of the national-bank act. Just at the moments of hesitation when timidity on the part of the banks spreads fear among business men and when boldness inspires confidence, the banks have been timid. Instead 67 See Chapter VII, i and ii. ss Compare F. S. Mead, "Bank Reserves in the United States, Canada, and England," Quarterly Journal of Economics, May, 1907. ' 59 Sprague, "History of Crises Under the National Banking System" (Publications of the National Mon- etary Commission), especially the chapters dealing with the crises of 1884, 1893, and 1907. «»Sprague's suggestion that institutions which make a business of holding bankers' deposits should be required by law to keep larger reserves than institutions which do a purely local business merits careful con- sideration. See his Banhing Beform in the United States, Cambridge, Mass., 1911, pp. 94ff. MITCHELL: BUSINESS CYCLES 553 of using their reserves promptly and liberally, they have sought to keep them intact or even to increase them by withdrawing money from other banks in which they have placed deposits. Willingness to "go below the legal reserves" on occasions when alarm is spreading would probably do more to check panics in the United States than the practice of holding larger reserves in ordinary times. Certainly, the latter measure would give little relief unless it were coupled with the former policy. CHAPTER XIIT ^ BUSINESS DEPRESSION I. How Crises Breed Depressions 1. Abortive Revivals of Activity Both in 1893 and in 1907, the passing of the panic in America was promptly followed by an increase of business activity. Newspapers and technical journals reported the re-opening of mills and factories which had been closed during the panic, the return to the road of commercial travelers who had been recalled, the freer buying of goods, etc. Optimists, encouraged by such reports, began to predict a speedy revival of prosperity. The crisis, they argued, had arisen from impaired confidence. If confidence could be restored, no real reason would remain why business should not be resumed on the scale prevailing before the panic. The supply of labor, the stock of raw materials, the equipment for trans- porting and manufacturing goods, had not been reduced in quantity or quality by runs upon the banks or by insolvencies. Everyone was eager to be at work. Let business men "look on the bright side," combat sceptics by talking pros- perity instead of hard times, prove their faith by their works, and all woulr" be well once more.^ In both cases a few weeks sufficed to prove the falsity of such predictions and the futility of such a policy. The little burst of activity which followed the panic subsided again, and hope gave place to renewed discouragement. There was no recurrence of the acute strain which had marked the panics, but in its place there came a slow liquidation which dragged on through many months. The failure of these "sunshine movements" lends point to the problem. Why are crises followed by depression? Why do so many mills which re-open their gates after the season of severe stress is over presently close again? Is the reason solely that the majority of business men will not or cannot shake off their gloomy forebodings? Or are there elements in the business situation as left by the crises which make a period of depression inevitable — elements beyond the control of sentiment? 1 In 1908 a number of business men in St. Louis, inspired by sentiments of this sort, organized a "National Prosperity Association," whicli sought to establish branches in all parts of the country. The chief effort of the association was directed toward inducing producers and manufacturers to agree upon a general resumption of operations on .Tune 1st. Financial Beview, 1909, p. 22. [554] MITCHELL: BUSINESS CYCLES 555 While a decline in the current volume of new orders and contracts for future performance begins some months before the crisis," yet the close of the crisis finds many factories, mines, contracting firms, and the like with a considerable amount of work still to be performed. A temporary stoppage of operations during a panic may be caused by inability to obtain money for pay-rolls, or by doubts concerning the ability of consignees to pay for goods when delivered. But when the banks have ceased to limit payments, and when indiscriminate distrust of the solvency of business enterprises has disappeared, then work is promptly resumed upon these left-over orders and contracts. Other concerns find themselves caught with stocks of raw materials already on hand or con- tracted for, far larger than are required by current consumption in a period when orders are light. Their best way of raising money to meet maturing obliga- tions is often to work up and sell these materials, even though very low prices have to be quoted in order to force a market. Such conditions account for the re-opening of many business enterprises in the weeks immediately following a panic. But, unless large new orders and contracts are obtained speedily, these busi- ness enterprises soon reach the end of their order-books or surplus stocks. Then they reduce their working forces, put their plants on part-time, or close altogether. As a matter of fact, neither in 1894 nor in 1908 did the volume of new business prove sufficient to support the mills which had re-opened. Hence the reports of the second, third, and fourth months after the panics told a disappointing tale of new suspensions of industrial operations.^ It is the paucity of new orders, then, which blights the hope of a quick restora- tion of prosperity after a severe crisis. Business men may be ready to talk prosperity in the hope that others may be induced to buy; but in their own purchases they practise extreme conservatism. Confidence may be restored in the sense that no one longer doubts the solvency of the banks, or the ability of any one fairly entitled to credit to secure loans. But confidence in the sense of sanguine expectations of profitable prices and a large volume of business is not restored, and cannot be restored by cheerful conversation. Past experience enforces the contrary belief that prices will fall and the volume of business shrink for some time to come. The processes which work out these results must now be described. " Compare Chapter XI, ii, 4. 3 These reports of fresh suspensions are seldom given as much prominence as the more cheerful news of earlier weeks. Indeed, the newspapers sometimes report the opening of a conspicuous establishment several, times within a few months, without referring to its intermittent suspensions. Such cases usually mean that the managers let their small current orders accumulate for a few weeks until enough work is on hand to justify starting the machinery, execute the work rapidly, and then close once more. Compare the Iron Age, July 30, 1908, vol. 82, p. 324.' 556 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA 2. The Cumulation of Depression A. THE VOLUME OF BUSINESS The wholesale discharges of workingmen, which occur during a crisis and again when the left-over contracts and accumulated stocks of materials have been worked off, cause a decline in consumers' demand. Many business and professional men likewise are compelled to retrench their family expenditures. Few people may starve ; but tens and hundreds of thousands are forced to put up with a less varied or a less abundant diet. Other lines of expenditure are reduced more sharply than the purchases of food. Clothing and furniture are used longer before being discarded and are replaced at urgent need by cheap articles. Fuel and light are economized to an uncomfortable degree; amuse- ments, travel, and all the dispensable adjuncts of comfort are pared down. Accumulated savings, personal credit at retail shops, and personal property which can be pawned are gradually eaten up by those hardest pressed. As these resources are exhausted, the straits of many families become worse and their purchases of commodities are progressively reduced. Hence the calls upon private and public charity usually increase and the volume of consumers' demand usually decreases as the period of hard times drags on.* In general, the current business demand for the raw materials and partially finished products from which consumers' goods are made shrinks with, the shrinkage of family expenditure. Indeed, for a time this business demand shrinlis even faster than consumers' demand; for either merchants or manu- facturers may fill their orders for a while after the crisis from their left-over stocks, which are likely to be larger than they care to carry in a dull market. On the other hand, in order to keep at least a skeleton organization together, manufacturers sometimes make goods for which they have no present sale. But operations of this last kind must necessarily be limited in scale. Information concerning the current demand for such producers' goods as are used in repairs and renewals of existing plants is scanty. Every period of intense activity brings out all the weak points of the active establishments, and leaves many of them in a somewhat run-down condition. The first lull in activity affords a favorable opportunity for overhauling plants and bringing their equip- ment up to the highest standard of efficiency. But what has been proved to be technically desirable may not be financially expedient. Many alterations are 4 This restriction of demand and the patent misery from which it arises are ordinarily more severe in the great cities and the industrial towns than in the country districts. The farmers may have abundant crops and remunerative prices at the very time when the mills are idle and their hands are walking the streets. Even when, as in 1894-96, the agricultural interest also suffers from bad seasons or low prices, there is less acute privation in the country than in the towns. Agricultural depression, however, renders the depression in the industrial centers still more intense; for the slackening of the farmers' demand for goods ruins the market for many manufacturing and mercantile enterprises. MITCHELL: BUSINESS CYCLES 557 planned as soon as the reduction in orders gives the managing staffs leisure ; but their execution is often deferred until a resumption of active demand for products is in sight. On the whole, it is probable that a leisurely course is taken by the majority of enterprises, so that the demand for repairs and renewals is light during at least the first quarter or two of depression. Concerning the demand for all the variety of goods which enter into new construction work it is possible to speak with more confidence. While many of the existing factories are standing idle, while many buildings lack tenants, while the railways have light traffic, etc., there is little inducement to enter upon the provision of new equipment. While investors have the recent decline in the price of securities fresh in mind, there is little use in issuing any but the best accredited grade of bonds. Finally, while a further fall of prices is in prospect, it is vain to expect the larger capitalists to take up new projects which can prob- ably be executed more cheaply after the lapse of a year or two. Engineers, archi- tects and the like may be kept busy preparing plans for future use ; but in the early stages of depression few contracts for new construction are actually put under way. Hence the demand for this kind of work continues the decline which began in the latter days of prosperity. The processes which cause this shrinking in the volume of trade, like the pro- cesses which cause an increase in times of revival, are cumulative in their effects. The more workmen are discharged the smaller becomes consumers' demand. Everj^ reduction in consumers' demand causes a further decline in the business demand for the materials from which consumers' goods are made. On the one hand, this latter decline causes more workmen to be discharged, and on the other hand it discourages managers from making the repairs and renewals which they have in mind, and discourages capitalists from putting their new projects under contract. The longer these plans for improving and extending the industrial equipment are deferred, the less grows emplojnnent in the enterprises which provide materials. And the longer men remain wholly or partly idle, the more are their families forced to scrimp expenditures, so that consumers' demand shrinks still further, and this shrinkage further intensifies the influences which are constricting the volume of business. Nevertheless, the lowest ebb in the physical volume of industrial production usually comes in either the first or second year after a severe crisis. The statis- tics presented in Chapter V, and the index numbers of the volume of trade com- piled by Kemmerer and Irving Fisher, all point to this conclusion.' Agricul- tural production, of course, is more erratic, showing an increase in periods of depression quite as often as it ^hows a decrease. What are the forces which 5 See Chapter V iii- E W. Kemmerer, Money and Credit Instruments in Their delation to General Prices, (ed. 2, New York, 1909), p.'lSl; Irving Fisher, The Purchasing Fewer of Money (New York, 1911), pp. 478-486. 558 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA counteract the cumulative shrinkage in the physical volume of trade Mdthin two or three years after a crisis is a problem which must be deferred to the concluding section of this chapter." B. THE FALL OF PEICES As a crisis subsides, the confusion which reigns in the markets for com- modities' gradually disappears. But, while the extremely low prices made in a few forced sales may not be matched again, the trend of fluctuations continues downward for a considerable period. Thus the fall in wholesale prices after the crisis of 1890 lasted at least four years in Grermany and at least six years in England and France ; that after the crisis of 1893 lasted four years in America ; that after the crisis of 3900 lasted three years in England and four years in Germany and Prance; that after the crisis of 1907 lasted from one to two years in different places.^ So far as recorded quotations show, then, the lowest level of commodity prices is reached, not during the crisis, but toward the close of the subsequent period of depression, or even early in the final revival of busi- ness activity.* The chief cause of this fall is the shrinkage in the demand for consumers' goods, raw materials, producers' supplies, and construction work analyzed in the preceding section. On the other side of the market stands a reserve army of capital and labor capable of producing the much larger supplies of com- modities for which there was call in the recent period of prosperity. The anxiety of these enterprises now standing idle or working below their capacity to get more business intensifies competition in those branches of trade where it already exists, and often extends competition into branches of trade whence it had been banished by agreements to sustain prices. Pools, working agreements, and combinations of other kinds become far more difficult to sustain in the face of a buyers' market, and many of them go to pieces because their members begin to suspect each other of secret undercutting of rates. Moreover, enterprises verging on bankruptcy and enterprises in the hands of receivers are peculiarly dangerous competitors for solvent firms to meet. They often disregard supple- mentary charges altogether and seek to defray their operating costs by taking work at prices which their rivals who are keeping up interest on their bonds find it hard to match. Finally, the fall in prices is cumulative. It spreads from one part of the system of prices to other parts along the various lines of inter- connection traced in Chapter II, and then spreads back again from the parts which are slow to be affected to the parts in which the decline began. « Section ii, 3. '' Chapter XII, ii, 4. « See Tables 9, 11, and 12. f Compare Chapter X, ii, 4. MITCHELL: BUSINESS CYCLES 559 As on the rise, so on the fall, there are marked differences in the promptness with which different classes of commodity prices begin to change and in the degree to which the change extends. Retail prices lag behind wholesale prices of the same goods ; consumers' goods lag behind producers' goods ; manufactured commodities lag behind the raw materials from which they are made ; farm and forest products are less regular in their fluctuations than mineral products. These differences arise partly from the differences in the shrinkage of demand pointed out above, partly from technical circumstances affecting the possibility of adjusting current production to current consumption, and partly from the effort to adjust selling prices to the total costs incurred by business enterprises rather than to the buying prices of particular wares." For reasons which have been sufficiently explained, the prices of labor fall less rapidly than the prices of commodities at wholesale." Interest rates on long- time loans behave like w^^gG rates in that they decline at a slow pace, but unlike wage rates in that they fall for a longer time." On the contrary, short-time interest rates fall faster and further than commodity prices." There is less hesitation at lending funds freely at low rates for three months than for ten years, and large sums which the owners will later invest in more permanent ways are transferred in times of depression from the bond to the monej^ market, checking the fall of rates in the first and accelerating the fall in the second. As for the prices of securities, high-grade bonds rise because of the decline in long-time interest rates, while, at the other end of the scale, common stocks fall under the combined influence of diminished earnings and dull prospects. Securities which stand between these extremes, like speculative bonds, stocks with a good dividend-paying record, and preferred stocks, rise or fall according as they partake more of the character of gilt-edged bonds or of common stocks. In most cases, the latter relations are more potent factors and prices decline, though less than the prices of ordinary shares." C. SAVINGS AND INVESTMENTS What is known concerning the changes which occur in money incomes in periods of depression suggests that the amount of money saved declines heavily — a conclusion which receives at least a measure of statistical support from data showing the deposits in savings banks." That the volume of funds required 10 For index numbers of the various classes of prices referred to see Chapter IV, i, 2, 3, 4. 5, 6, and 9; for a fuller analysis of the causes of the differences in range of fluctuation see Chapter X, iii, 1, T>. 11 For index numbers see Chapter TV, ii; for analysis see Chapter X, iii, 2. 12 For index numbers see Chapter IV, iii, 2 and 4; for analysis see the following discussion of "Savings and Investment. ' ' 13 For index numbers see Chapter IV, iii, 1, 3, and 4. 1* See Chapter IV, iv. As the tables in that section show, there is usually a reaction from the lowest prices touched during a crisis, particularly if the crisis has degenerated into a panic; -but when the subsequent de- pression is severe and prolonged prices begin to sag again, and sometimes reach a lower point than that recorded m the time of most intense strain. 15 See Chapter VIII, i, and ii, 1. 560 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA for current investments, in the extension of old or the construction of new con- cerns, also shrinks seriously is attested by abundant evidence/" Finally, the often-noted change in the preference of investors — their neglect of the specula- tive shares which were the favorites of flush days and their taste for ultra-con- servative bonds — is also proved by statistics." All this answers to expectations. But the investment market presents one peculiar feature. The first year of depression often brings an exceedingly heavy issue of securities by large corporations." The apparent anomaly, however, has a simple explanation. During the high tide of prosperity preceding a crisis, many great enterprises provide for their most pressing financial needs by selling short-time notes or by borrowing directly from the banks.^° After the crisis when interest rates have begun to relax, they seek the first opportunity to fund these floating debts into long-time bonds. Of course, large issues of securities made for such purposes represent neither extensions of new equipment nor investments of fresh capital, but at most a shifting from one form of obligations to another form, and from one set of lenders to another set. D. THE CUEEENCY AND THE BANKS Upon the production of gold, the proportion of the output applied to mone- tary uses, and the international movements of the existing monetary stock, depression exercises a complicated set of influences which need not be described in detail because they are the precise opposites of the influence exercised by pros- perity.^" The net outcome of all the factors involved differs from one period of depression to the next. In the United States, the one country for which we have adequate data, the stock of gold currency declined in the dull months January to July 1891, February to November 1894, July to September 1895, April to July 1896, March to May 1908, and July 1909 to April 1910 ; but it rose during the dull months January to May 1897, May to November 1908, April 1910 to May 1911, and during the dull years 1903-04.^^ There is therefore no warrant for the belief that the quantity of gold currency contracts regularly with the pecuniary volume of business. As for other kinds of money, bank notes alone possess pretensions to elas- ticity which merit serious consideration. However, a survey of the records for England, France, and Germany, as well as for the United States, shows that in these countries the amount outstanding has seldom shrunk in years of business depression.^^ 16 See Chapter VIII, ii, 3-6. " See Chapter VIII, ii, 2. 18 See Chapter VIII, ii, 3. 10 See Chapter XI, ii, 3, and iii, 1. 20 See Chapter XI, iii, 4. 21 See the monthly figures for the stock of gold money in the appendices to the annual Reports of the Treasurer of the United States. 22 See Chapter VI, iii. MITCHELL: BUSINESS CYCLES 561 Much more decided than its influence upon the volume of the currency, is the influence of depression upon the distribution of the money in circulation between the banks and the public. As soon as the strain of a severe crisis relaxes, current deposits of cash in the banks begin to exceed current with- drawals, so that presently the banks hold a decidedly larger proportion of the monetary stock than in seasons of active trade.^^ Of course, this process increases the deposits of the banks so far as deposits represent actual cash. In addition, the large reserves increase the ability of the banks to lend their own credit, and therefore to extend the deposits which result from discounts. Nevertheless, deposit currency usually shrinks in volume when a period of prosperity merges into a period of depression. The elasticity of this element in the circulating mediiun, indeed, is decidedly greater than that of money. As a result, the ratio between deposits subject to check and money in circulation falls in dull years.^* One other fact concerning the effect of depression on the currency is brought out in Chapter VI. The velocity of the circulation of money, and in higher degree the velocity of the circulation of checks, declines with the activity of trade.^^ By these changes in the quantity of money and of deposit currency and in the velocities at which both money and checks circulate, the volume of payments is reduced in harmony with the fall of prices and the shrinkage in the physical volmne of trade. In this complicated series of readjustments the causative influences, however, are not all on the side of the business situation. The failure of the quantity of money to contract promptly when a crisis turns into depression results in monetary redundancy, of which the visible sign is the accumulation of idle cash in the banks. This accumulation, we have seen, does not produce the expansion in loans and deposits which would occur if the prospects of profits were bright.^" But it does increase the competition among banks for such business as is to be had, and aids in producing that fall in the discount rates which we have seen to be more rapid than the fall of prices at wholesale." In so far, the quantity of money is a factor in accelerating the readjustment of costs to selling prices which ultimately restores the prospects of profits and ushers in a period of expanding trade and rising prices.'' Hence 23 See Chapter VI, iv. z* See Chapter VI, v. 25 See Chapter VI, vi. 26 New York often presents an apparent exception to this rule. In 1908, for example, bank loans were larger in this city than in 1907, chiefly because country banks were sending to New York idle funds which they could not use at home, and were depositing in the banks at 2 per cent interest funds which they had formerly lent on their own account at call on the Stock Exchange. The demand which absorbed the increased supply of loans arose largely from the fact that money could be had for 1 per cent or even less at call and invested in securities which yielded interest or dividends of 4 per cent or more. The national banks as a whole, and the great foreign banks for which we have statistics, usually show a decline in loans when prosperity is succeeded by depression. See the various tables in Chapter VII. 27 See the paragraph upon the prices of loans in section B, above, 28 See the next section of this chapter. 562 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA such an increase in the world's production of gold as has been going on in recent years tends to cut short and to mitigate periods of depression, as well as to prolong and to intensify periods of prosperity. By thus altering some- what both the intensity and the relative duration of these two phases of business cycles, it tends to give an upward direction to those long-period movements of the price curve in which the years of depression and years of prosperity are averaged together. II. How Depeession Breeds Peospeeity 1. The Re-adjustment of Prime Costs The shrinkage which depression brings in the volume of orders, and the accompanying decline of selling prices put severe pressure upon the managers of business enterprises to reduce their expenses within the narrowest feasible limits. Certain of the price-phenomena which have been pointed out^' show that the resulting efforts are successful at least in part. That wholesale prices fall faster than retail prices, that the prices of pro- ducers' goods fall faster than those of consumers' goods, and that the prices of raw materials fall faster than the prices of manufactured products means, of course, that in these cases buying prices are reduced more than the correspond- ing selling prices.'" Further, since short-time interest rates fall much faster 2» See section i, 2, B, above. 30 The statistical evidence given by the tables of Chapter IV, i, may be summarized as follows. Plus signs mean that prices rose instead of falling. Number of points by which relative prices fell 1893-96 1902-04 25 foods at wholesale in the United States 31 7 25 foods at retail in the United States 10 1891-96 1900-03 1907-08 23 foods at wholesale in England 21 5 19 foods at retail in England 12 -{-4 +3 1891-96 1900-04 1907-08 23 foods at wholesale in France 25 1 8 36 foods at retail in Prance 8 +1 +2 1890-96 1903-04 1907-08 20 raw materials m the United States 27 4 12 20 manufactured products in the United States 22 7 9 5 raw materials in the United States 41 _|- 7 7 5 partly manufactured products in the United States .... 23 +12 6 5 finished commodities in the United States 14+6 5 45 raw producers' goods in the United States 28 15 28 manufactured producers' goods in the United States 22 14 18 raw mineral products in the United States 27 5 20 23 manufactured mineral products in the United States 22 2 10 10 raw forest products in the United States 13 +19 ig 9 manufactured forest products in the United States 20 +5 -13 9 raw animal products in the United States 22 16 7 18 manufactured animal products in the United States 18 1 3 18 raw farm products in the United States 43 -|. 2 2 40 manufactured farm products in the United States 27+2 7 MITCHELL: BUSINESS CYCLES 563 than wholesale prices, the cost of loans declines in proportion to the prices of products.'' Wages also are reduced in seasons of severe depression, but in this case the reduction is less than that in commodity prices.'' It does not neces- sarily follow, however, that the cost of labor increases in proportion to the selling prices of what labor produces. For there is strong evidence that the efficiency of labor becomes much greater in dull years than it had been in the preceding brisk years. Overtime ceases, and with it cease not only the payment of extra rates but also the weariness of long hours. When working forces are reduced in size they are raised in quality by weeding out the less desirable hands. Most important of all, the fear of being discharged at a time when thousands of men are already looking in vain for work disposes every man who is kept to do his best — to keep any pace which may be set, even at grave danger of over- taxing his strength.'' The heightening of the physical productivity of labor which results from these changes does more than the fall of wages to diminish the ratio between money cost of labor 'and money value of products. When selling prices have been materially reduced, enterprises which are poorly equipped, disadvantageously located, or inefficiently managed are often compelled to close altogether, because they cannot get back even their prime costs on an output sold at current rates. Within the stronger enterprises the poorer portions of the equipment are allowed to stand idle for the same reason. It results that the producers who remain in the race during periods of depression can "figure" on the basis of prime costs considerably lower than the average which prevails in seasons of prosperity. Finally, depression checks the numerous small wastes which grow up within most business enterprises during years of intense activity. There is not only a strong incentive but also sufficient leisure to economize materials, to make the 31 A similar summary follows of the evidence from Chaprter IV, i and iii, relating to wholesale prices and discount rates in periods of depression. Number of points by which ^ relative prices and relative rates of interest fell , ' V 1893-97 1903-04 1907-08 Wholesale prices in America 16 9 Discount rates in New York, 60-90 days '2 25 41 3 890-95 1900-04 1907-08 Wholesale prices in England 1'5 J 11 Market discount rates in London 153 46 107 Wholesale prices in France 15 8 14 Market discount rates in Paris 47 48 59 Wholesale prices in Germany 21 8 8 Market discount rates in Berlin 59 4*5 54 32 The evidence of the tables (Chapter IV, i and ii) is as follows: , . , ^ ^. ^ Number of points by which relative prices and relative I fell 1893-95 1903-04 Wholesale prices in America 12 Eelative wages in America ^^^f^^ +^1^^ ^^-^-^-^^ Wholesale prices in England '^o I t Eelative wages in England 4 a i 33 Compare Chapter XI, i, 3, 564 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA most of by-products, to supervise the work of every employe, to adjust each successive step of each process accurately to the other steps, and to make what- ever changes in .organization promise a saving of cost without entailing a heavy investment of fresh capital. 2. The Re-adjustment of Supplementary Costs Reductions in prime costs begin to be made promptly upon the passing of prosperity. But, for a while at least, they are accompanied by an increase of supplementary costs per unit of product, arising from the distribution of the existing fixed charges over a declining volume of sales. To determine the aver- age net effect of these opposing changes upon total cost per unit is impossible for lack of information, detailed in character and extensive in scope, regarding the quantitative importance of the numerous factors involved. But, whatever these net effects may be, it is certain that the policy of making selling prices cover total costs, is perforce abandoned by many enterprises when business enters upon the phase of depression. Competition for what business is to be had often results in a temporary disregard of supplementary costs and the basing of quota- tions upon estimates which include little beyond the prices of materials, freight, andJabor, Obviously such a disregard of supplementary costs in fixing selling prices cannot continue long without threatening insolvency. Unless the coupons of bond-holders and the rents of lessors are met, the creditors will secure the appointment of a receiver to manage the property in their interest. But, under the modern form of business organization, insolvency does not necessarily involve suspension of operations. When a considerable sum has been invested in real estate, plant, machinery, or good will, so specialized in form that it cannot be diverted to other uses without serious loss, then an insolvent concern is usually kept running so long as it can pay even a slight margin above the indis- pensable current expenses. The financial obligations of the enterprise, however, are so re-organized as to turn the temporary disregard of supplementary costs into a permanent reduction of fixed charges. The bond-holders may be forced to concede a reduction in the rate of interest or in the nominal value of their principal, lessors may be compelled to scale down their rents, preferred shares may be turned into common, outsiders may buy the whole company under fore- closure at a price which leaves little for the common stockholders, or some other plan of re-organization may be arranged among the various parties at interest which enables the enterprise to continue its business with some prospect of meeting all of its obligations." SI Compare, for example, Stuart Daggett 's detailed study of Railroad Reorganization (Harvard Economic Studies, vol. IV), Boston, 1908, MITCHELL: BUSINESS CYCLES 565 Such forced reductions of supplementary costs are a common feature not only of the months succeeding a crisis but also of the years of depression which follow. For many enterprises which weather the violent storm are so weakened that they cannot withstand the prolonged strain of low prices and meager busi- ness. And both the weak enterprises still struggling desperately to avoid receiv- erships and the other enterprises which have been re-organized are particularly dangerous competitors for solvent concerns, and make it difficult for the latter to avoid a similar compromise with their creditors. But just so fast as the process of re-organization is carried through, the prospects of profits are improved by the scaling down of costs. A somewhat similar, but less drastic, reduction of supplementary costs is gradually effected in many enterprises which never pass through the hands of receivers. Reluctantly managers write down the book value of plants and equip- ment that are not paying their way. New men buy into old enterprises and estimate the selling prices they must charge on the basis of the moderate sums they have invested. As old leases run out they may well be renewed at lower rents, and as old bonds mature they may well be replaced at lower rates of inter- .est. More in general, business men are constrained to admit to themselves and to their bankers that the capitalized values of their enterprises have suffered somewhat the same decline that the stock exchange records for listed securities. While these reduced capitalizations arise primarily from the reduction of profits, they also become the basis for reduced expectations of return, and justify a smaller capital charge in fiixing selling prices. Finally, such new enterprises as may be set on foot during depression have the advantage not only of low prime costs, conferred by improved processes and machinery, but also of low supplementary costs, conferred by the low prices for construction work and the low interest on bonds. 3. The Increase in the Physical Volume of Business E^ddence has been cited to show that the physical volume of business reaches its lowest ebb within the first or second year after a crisis.'" In other words, the second or third year of depression regularly ushers in an expansion in the quantity of goods turned out by factories, transported by railways, and handled by merchants. What are the processes which bring about this result in the face of the many discouraging circumstances of dull times? First, the accumulated stocks of goods carried over from the preceding period of prosperity are gradually disposed of. Even when current consump- tion is small, manufactories and merchants can reduce their stocks of raw materials and finished wares by filling orders chiefly from what is on hand and confining purchases to the small quantities needed to keep full assortments. 35 See section i, 2, A, of the present chapter. 566 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA But, when these stocks have once been reduced to the smallest dimensions allowed by the regular filling of orders, then current purchases and current production are perforce increased, even though current consumption does not grow larger. In somewhat similar fashion, families can get on for a time with the clothing and furnishings purchased in the later days of prosperity, and business enter- prises can get on for a time with their old equipment — not, however, for an indefinite time. As these articles are gradually worn out and discarded, it becomes necessary to buy new ones, if money can be found for the purpose. Then the demand for both consumers' and producers' goods begins to pick up. Third, the aggregate volume of consumers' demand depends in large part upon the number of the population, and this number has been shown to increase at almost the same rate in depression as in good times.^" This factor counts for nothing in France, but for much in Germany, and for something in England. Its importance in the United States is uncertain, because we have no adequate statistics comparing the excess of births over deaths with the excess of emigrants over immigrants. Once more, the development of new tastes among consumers, the appearance of new materials, and the introduction of new processes do not come to a stand- still even in times of depression. While the changes in the character of demand which result may restrict the market for commodities which are being super- seded, the losses of the producers of the latter are gradually written off, and there remains over the stimulating effect of aetivit)^ among producers of the novelties. Finally, and most important of all, the later stages of depression see a marked increase in the demand for new construction. This phase of the devel- opment requires more extended notice. While the amount of funds saved each year by the people of any country probably declines in hard times, certainly saving never ceases." For a time, however, the fresh accumulations of capital are not accompanied by a corre- sponding volume of fresh investments in business ventures. Refunding oper- ations make a large proportion of the business done in the investment market, for governments and business enterprises alike are keen to secure the advantage of the low rates of interest which prevail.^* Of the money seeking fresh invest- ments, whether it be the product of current savings or of refunding, much goes ir)to the purchase of property which embarrassed holders are forced to sell. That is, certainly a considerable and probably an extremely large share of the liquid capital provided by certain individuals in seasons of depression is used merely to cancel part of the losses incurred by other individuals. Such invest- so See Chapter V, i. 3T See Chapter VIII, i. 38 Compare the tables in Chapter VIII, ii, 3. MITCHELL: BUSINESS CYCLES 567 ments represent a redistribution of ownership, but no new creations of indus- trial equipment.'" Finally, a part of the funds which in the prosperous phase of the business cycle seek the investment market are left during the earlier stages of depression on deposit in the banks, and used, so far as a use can be foimd, in making short-time loans.*" The changes in the business situation which in the later stages of depression direct investment funds once more to the construction of new equipment are numerous. (1) When most of the weaker owners of business enterprises have once been squeezed out and forced to sell their holdings, and when the necessary corporate reorganizations have been largely completed, the opportunities to buy into old enterprises on favorable terms become less mmierous. Thereafter more of the men seeking business openings build for themselves. (2) The timidity inspired among investors by the crisis gradually wears off, and capi- talists large and small become more ready to risk their funds in business ventures. (3) The low rate of interest at which money can be borrowed on long time, provided good security be offered, means that the more enterprising spirits can secure whatever funds they require in addition to their own means on teims which will keep the fixed charges moderate for years to come. (4) Even more important in most cases in its bearing on fixed charges is the low initial cost at which contracts for construction can be let when labor is efficient and materials are cheap. (5) Under the influence of systematic research, in recent times the progress of industrial technique has become fairly steady and continuous. Hence, the longer the period during which new construction is checked by business depression the greater becomes the accumulation of tech- nical improvements of which new plants can take advantage, and therefore the greater becomes the inducement to invest in new equipment. (6) The gradual growt>h of the current demand for consumers' and producers' goods, brought about in the manner already explained, stimulates the investment demand with which we are now dealing. When current orders begin to increase, the man- agers of existing enterprises are encouraged to begin the improvements in their facilities which perhaps have been planned for several years, and the organizers of new ventures are encouraged to let their contracts. Both sets of investors are anxious to make their bargains for construction before the cost of building advances and to have their new plants ready for operation by the time a revival of activity becomes pronounced. Under the combined pressure of these various business forces, then, a marked increase in the demand for all the innumerable kinds of commodities and labor required for construction occurs in the later stages of depression. Of course this increase in the volume of demand from investors causes fuller employment of labor and assures more orders to the existing producers of pro- 39 Compare the digest of Johannsen 's theory of "impair savings" in Chapter I, ii, 14. ■"> See section i, 2, B, above. 568 MEMOIRS OF THE UNIVEESITT OF CALIFORNIA ducers' goods. There follows a new expansion in consumers' and producers' demand, and this expansion reacts in the way suggested to enhance investment demand. Thus the increase in the volume of business is cumulative in its growth. Unless the processes which we have traced are checked by some unto- ward event such as a serious failure of crops, within a year or two they carry the physical volume of business to higher levels than those reached at the close of the preceding period of prosperity.*^ 4. The End of Liquidation The various processes just described combine reductions in both prime costs and fixed charges with an expansion in the physical volume of business. In this fashion depression ultimately breeds prosperity. For of course these changes increase prospective profits, and in the money economy prospective profits are the great incentive to activity. But for many months the processes by which depression works its own ending are kept down to a slow pace by the continued fall of prices. For the data presented in Chapters IV and V indicate that the price level and even the pecuniary volume of business usually continue to fall for some time after the physical volume of business has begun to rise. The rate at which prices fall, however, is slower in the later than in the earlier stages of depression. And the effect of the fall in reducing profits is mitigated, if not wholly offset, by the increasing volume of sales. For to the various factors already men- tioned as reducing supplementary costs per unit another factor is added when fixed charges begin to be distributed over an increasing output. The business situation into which depression evolves, then, differs radically from the situation in which it began. Most of the heavy stocks of goods which hung menacingly over the market at the close of the crisis have been disposed of, so that every increase of consumption leads to an equivalent increase of production. The fioating debts and the heavy fixed charges which threatened widespread insolvency have been paid off, written down, or otherwise read- justed, so that the enterprises can once more live within their incomes. Even the great mass of business enterprises which did not change hands and which made no compromise with their creditors are now assigned a lower capitalized value corresponding to their moderate expectaltions of profit. The volume of credits outstanding is well within the limits which mercantile houses and banks can support. Investors have ceased to be foolishly timid, and they have not yet become recklessly bold. Prices are still declining, but at a slackening pace. Costs of doing business have been so reduced as to leave a narrow margin of profit despite the low scale of selling prices. The demand for goods of many ■11 Compare the various indices of the volume of business presented in Chapter V. MITCHELL: BUSINESS CYCLES 569 kinds — though not such as to tax the existing equipment to its utmost — ^is already large and growing steadily larger.*^ In fine, this business situation is that described at the beginning of Chapter X — the situation out of which a revival of activity presently develops. Having thus come round again to its point of departure, after tracing the processes of cumulative change by which prosperity breeds crisis, crisis evolves into depres- sion, and depression paves the way for a return of prosperity, the present theory of business cycles has reached its appointed end. *2 Alone among the writers reviewed in Chapter I, Veblen holds that the business conditions of depression tend to become chronic rather than to breed prosperity. (Section ii, 10.) The basis for this view is that the continual improvements in industrial technique give new plants such an advantage in cost over their older competitors as to keep the majority of existing enterprises always in difficulties. The one remedy which Veblen sees for this condition, apart from the favorable accidents which occasionally interrupt the downward trend of prices, is an ever more thorough coalition or combination among business men to restrain competition. The reason why business history has not yet answered this expectation is that other price-making factors have proved more potent than technical improvements in methods of production. Among these other fac- tors, the one on which Veblen lays stress — extension of combinations in restraint of competition — certainly re- quires attention. But the factors mentioned above — particularly the reduction in the operating and supple- mentary costs of the old enterprises themselves, and the increase of demand for construction work — have so tar exercised a powerful influence in restoring conditions which promise a fair margin of profit. To forecast the future relative force of the numerous factors involved is far from easy. Of course de- pressions bred prosperity in the days before competition had been severely shackled by combination; but in those days the progress of technique was seemingly less steady than it is now. Should the further progress of combination be checked, however, it is still probable that the changes which depression brings about in the efficiency of labor, in the policy of investors, in the capitalization of corporations, in the relative prices of finished products and raw materials, etc., would continue to over-balance the depressing influence exercised by the introduction of improved processes and machinery. 1^ CHAPTER XIV THE WIDER ASPECTS OP BUSINESS CYCLES I. Summary of the Pbeoeding Theoey of Bijsi^^ess Cycles The theory of business cycles presented in Chapters X-XIII is a descriptive analysis of the processes of cumulative change by which a revival of activity / develops into intense prosperity, by which this prosperity engenders a crisis, by which crisis turns into depression, and by which depression, after growing more severe for a time, finally leads to such a revival of activity as that with which the cycle began. This analysis rests primarily upon an elaborate statistical enquiry into the phenomena of recent cycles in the United States, England, Prance, and Grermany. The statistical line of attack was chosen because the problem is essen- tially quantitative in character, involving as it does the relative importance of divers forces which are themselves the net resultants of innumerable business decisions. The selection of statistical data, the methods of presentation, and the co-ordination of the results were determined in large part by ideas borrowed from theoretical writers or from financial journals. But all the tables of figures and all the borrowed ideas were fitted into a framework provided by a study of the economic organization of to-day, which showed that the industrial process of making and the comctnercial process of distributing goods are thoroughly subordinated to the business process of making money. The theory derived from these materials has filled so many pages that a summary may prove serviceable. There is always danger, however, that a plausible summary may carry too much weight. Readers who have looked over Chapter I -will appreciate how easy it is to make many dissimilar explanations of crises sound convincing when attention is confined to a restricted range of phenomena. Only by putting any theory to the practical test of accounting for actual business experience can its value be determined. The case for the present theory, therefore, and also the case against it, is to be found not in the easy summary which follows, but in the difficult chapters which precede, or better still in an independent effort to use it in interpreting the ceaseless ebb and flow of economic activity. [ 570 ] MITCHELL: BUSINESS CYCLES 571 1. The Cumulation of Prosperity With whatever phase of the business cycle analysis begins, it must take for granted the conditions brought about by the preceding phase, postponing explanation of these assumptions until it has worked around the cycle and come again to its starting point. A revival of activity, then, starts with this legacy from depression : a level of prices low in comparison with the prices of prosperity, drastic reductions in the costs of doing business, narrow margins of profit, liberal bank reserves, a conservative policy in capitalising business enterprises and in granting credits, moderate stocks of goods, and cautious buying. For reasons which will appear in the sequel, such conditions are accompanied by an expansion in the physical volume of trade. Though slow at first, this expansion is cumulative. Now it is only a question of time when an increase in the amount of business transacted which grows more rapid as it proceeds will turn dullness into activity. Left to itself, this transformation is effected by slow degrees ; but it is often hastened by some propitious event arising from other than domestic business sources, such as exceptionally profitable harvests, Tieavy purchases of supplies by government, or a marked increase in the export demand for the products of home industry. Even when a revival of activity is confined at first within a narrow range of industries or within some single section of the country, it soon spreads to other parts of the business field. For the active enterprises must buy more materials, wares, and current supplies from other enterprises, the latter from still others, and so on without assignable limits. Meanwhile all enterprises which become busier employ more labor, use more borrowed money, and make higher profits. There results an increase in family incomes and an expansion of consumers' demand, which likewise spreads out in ever widening circles. Shopkeepers pass on larger orders for consumers' goods to wholesale merchants, manufacturers, importers, and producers of raw materials. All these enterprises require more supplies of various kinds for handling their growing trade, and increase the sums which they pay out to employes, lenders, and proprietors — thus stimulating afresh the demand for both producers' and consumers' goods. Soon or late this expansion of orders reaches back to the enterprises from which the impetus to greater activity was first received, and then this whole complicated series of reactions begins afresh at a higher pitch of intensity. All this while, the revival of activity is instilling a feeling of optimism among business men, and this feeling both justifies itself and heightens the forces which engendered it by making everyone readier to buy with freedom. "While the price level is often sagging slowly when a revival begins, the cumulative expansion in the physical volume of trade presently stops the fall and starts a rise. For, when enterprises have in sight as much business as they 572 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA can handle with their existing facilities of standard efficiency, they stand out for higher prices on additional orders. This policy prevails even in the most keenly competitive trades, because additional orders can be executed only by bi'eaking in new hands, starting old machinery, buying new equipment, or making some other change which involves increased expense. The expectation of its coming hastens the advance. Buyers are anxious to secure or to contract for large supplies while the low level of quotations continues, and the first definite signs of an upward trend of quotations brings out a sudden rush of orders. Like the increase in the physical volume of business, the rise of prices spreads rapidly ; for every advance of quotations puts pressure upon someone to recoup himself by making a compensatory advance in the prices of what he has to sell. The resulting changes in prices are far from even, not only as between different commodities, but also as between different parts of the system of prices. Retail prices lag behind wholesale, the prices of staple consumers' behind the prices of staple producers ' goods, and the prices of finished products behind the prices of their raw materials. Among raw materials, the prices of mineral products refiect the changed business conditions more regularly than do the prices of raw animal, farm, or forest products. Wages rise often more promptly, but always in less degree than wholesale prices; discount rates rise sometimes more slowly than commodities and sometimes more rapidly ; interest rates on long loans always move sluggishly in the early stages of revival, while the prices of stocks — particularly of common stocks — both precede and exceed commodity prices on the rise. The causes of these differences in the promptness and the energy .with which various classes of prices respond to the stimulus of business activity are found partly in differences of organization between the markets for commodities, labor, loans, and securities; partly in the technical circumstances affecting the relative demand for and supply of these several classes of goods ; and partly in the adjusting of selling prices to changes in the aggregate of buying prices which a business enterprise pays, rather than to changes in the prices of the particular goods bought for resale. In the great majority of enterprises, larger profits result from these divergent price fluctuations coupled with the greater physical volume of sales. For, while the prices of raw materials and of wares bought for resale usually, and the prices of bank loans often, rise faster than selling prices, the prices of labor lag far behind, and the prices which make up supplementary costs are mainly sterotyped for a time by old agreements regarding salaries, leases, and bonds. This increase of profits, combined with the prevalence of business optimism, leads to a marked expansion of investments. Of course the heavy orders for machinery, the large contracts for new construction, etc., which result, swell still further the physical volume of business, and render yet stronger the forces which are driving prices upward. MITCHELL: BUSINESS CYCLES 573 Indeed, the salient characteristic of this phase of the business cycle is the cumulative working of the various processes which are converting a revival of trade into intense prosperity. Not only does every increase in the physical volume of trade cause other increases, every convert to optimism makes new converts, and every advance of prices furnish an incentive for fresh advances ; but the growth of trade also helps to spread optimism and to raise prices, while optindsm and rising prices both support each other and stimulate the growth of trade. Finally, as has just been said, the changes going forward in these three factors swell profits and encourage investments, while high profits and heavy investments react by augmenting trade, justifjdng optimism, and raising prices. 2. Mow Prosperity Breeds a Crisis While the processes just sketched work cumulatively for a time to enhance prosperity, they also cause a slow accumulation of stresses Avithin the balanced system of business — stresses which ultimately undermine the conditions upon which prosperity rests. Among these stresses is the gradual increase in the costs of doing business. The decline in supplementary costs per unit of output ceases when enterprises have once secured all the business they can handle with their standard equipment, and a slow increase of these costs begins when the expiration of old contracts makes necessary renewals at the high rates of interest, rent, and salaries which prevail in prosperity. Meanwhile prime costs rise at a relatively rapid rate. Equipment which is antiquated and plants which are ill located or otherwise work at some disadvantage are brought again into operation. The price of labor rises, not only because standard rates of wages go up, but also because of the prevalence of higher pay for overtime. More serious still is the fact that the efficiency of labor declines, because overtime brings weariness, because of the employment of "undesirables," and because crews cannot be driven at top speed when jobs are more numerous than men to fill them. The prices of raw materials continue to rise faster on the average than the selling prices of products. Finally, the numerous small wastes, incident to the conduct of business enterprises, creep up when managers are hurried by a press of orders demanding prompt delivery. A second stress is the accumulating tension of the investment and money markets. The supply of funds available at the old rates of interest for the purchase of bonds, for lending on mortgages, and the like, fails to keep pace with the rapidly swelling demand. It becomes difficult to negotiate new issues of securities except on onerous terms, and men of affairs complain of the "scarcity of capital." Nor does the supply of bank loans grow fast enough to keep up with the demand. For the supply is limited by the reserves which 574 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA bankers hold against their expanding demand liabilities. Pull employment and active retail trade cause such a large amount of money to remain suspended in active circulation that the cash left in the banks increases rather slowly, even when the gold output is rising most rapidly. On the other hand, the demand for bank loans grows not only with the physical volume of trade, but also with the rise of prices, and with the desire of men of affairs to use their own funds for controlling as many business ventures as possible. Moreover, this demand is relatively inelastic, since many borrowers think they can pay high rates of discount for a few months and still make profits on their turnover, and since the corporations which are unwilling to sell long-time bonds at the hard terms which have come to prevail try to raise part of the funds they require by discounting one- or two-year notes. Tension in the bond and money markets is unfavorable to the continuance of prosperity, not only because high rates of interest reduce the prospective margins of profit, but also because they check the expansion in the volume of trade out of which prosperity developed. Many projected ventures are relinquished or postponed, either because borrowers conclude that the interest would absorb too much of their profits, or because lenders refuse to extend their commitments farther. There is one important group of enterprises which suffers an especially severe check from this cause in conjunction with high prices — the group which depends primarily upon the demand for industrial equipment. In the earlier stages of prosperity, this group usually enjoys a season of exceptionally intense activity. But when the market for bonds becomes stringent, and — what is often more important — when the cost of construction has become high, business enterprises and individual capitalists alike defer the execution of many plans for extending old and erecting new plants. As a result, contracts for this kind of work become less numerous as the climax of prosperity approaches. Then the steel mills, foundries, machine factories, copper smelters, quarries, lumber mills, cement plants, construction companies, general contractors, and the like find their orders for future delivery falling off. While for the present they may be working at high pressure to complete old contracts within the stipulated time, they face a serioLis restriction of trade in the near f utm'e. The imposing fabric of prosperity is built with a liberal factor of safety ; but the larger grows the structure the more severe become these internal stresses. The only effective means of preventing disaster while continuing to build is to raise selling prices time after time high enough to offset the encroachments of costs upon profits, to cancel the advancing rates of interest, and to keep investors willing to contract for fresh industrial equipment. But it is impossible to keep selling prices rising for an indefinite time. In default of other checks, the inadequacy of cash reserves would ultimately compel the banks to refuse a further expansion of loans upon any terms. But before this MITCHELL: BUSINESS CYCLES 575 stage has been reached, the rise of prices is stopped by the consequences of its own inevitable inequalities. These inequalities become more glaring the higher the general level is forced ; after a time they threaten serious reduction of profits to certain business enterprises, and the troubles of these victims dissolve that confidence in the security of credits with which the whole towering structure of prosperity has been cemented. What, then, are the lines of business in which selling prices cannot be raised sufficiently to prevent a reduction of profits ? There are certain lines in which selling prices are stereotyped by law, by public commissions, by contracts of long term, by custom, or by business policy, and in which no advance, or but meagre advances can be made. There are other lines in which prices are always subject to the incalculable chances of the harvests, and in which the market value of all accumulated stocks of materials and finished goods wavers with the crop reports. There are always some lines in which the recent construction of new equipment has increased the capacity for production faster than the demand for their wares has expanded under the repressing influence of the high prices which must be charged to prevent a reduction of profits. The unwillingness of investors to let fresh contracts threatens loss not only to contracting firms of all sorts, but also to all the enterprises from whom they buy materials and supplies. The high rates of interest not only check the current demand for wares of various kinds, but also clog the effort to maintain prices by keeping large stocks of goods off the market until they can be sold to better advantage. Finally, the very success of other enterprises in raising selling prices fast enough to defend their profits aggravates the difficulties of the men who are in trouble. For to the latter every further rise of prices for products which they buy means a further strain upon their already stretched resources. As prosperity approaches its height, then, a sharp contrast develops between the business prospects of different enterprises. Many, probably the majority, are making more money than at any previous stage of the business cycle. But an important minority, at least, face the prospect of declining profits. The more intense prosperity becomes, the larger grows this threatened group. It is only a question of time when these conditions, bred by prosperity, will force some radical readjustment. Now such a decline of profits threatens worse consequences than the failure to realise expected dividends. For it arouses doubt concerning the security of outstanding credits. Business credit is based primarily upon the capitalized value of present and prospective profits, and the volume of credits outstanding at the zenith of prosperity is adjusted to the great expectations which prevail when the volume of trade is enormous, when prices are high, and when men of affairs are optimistic. The rise of interest rates has already narrowed the margins of security behind credits by reducing the capitalized value of given profits. When profits themselves begin to waver the case becomes worse. 576 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Cautious creditors fear lest the shrinkage in the market rating of the business enterprises which owe them money will leave no adequate security for repayment. Hence they begin to refuse renewals of old loans to the enterprises which cannot stave off a decline of profits, and to press for a settlement of outstanding accounts. Thus prosperity ultimately brings on conditions which start a liquidation of the huge credits which it has piled up. And in the course of this liquidation prosperity merges into crisis. 3, Crises Once begun, the process of liquidation extends rapidly, partly because most enterprises which are called upon to settle their maturing obligations in turn put similar pressure upon their own debtors, and partly because, despite all efforts to keep secret what is going forward, news presently leaks out and other creditors take alarm. While this financial readjustment is under way, the problem of making profits on current transactions, is subordinated to the more vital problem of main- taining solvency. Business managers concentrate their energies upon providing for their outstanding liabilities and upon nursing their financial resources, instead of upon pushing their sales. Tn consequence, the volume of new orders falls off rapidly. That is, the factors which were already dimming the prospects of profits in certain lines of business are reinforced and extended. Even when the overwhelming majority of enterprises meet the demand for payment with success, the tenor of business developments therefore undergoes a change. Expansion gives place to contraction, though Avithout a violent wrench. Discount rates rise higher than usual, securities and commodities fall in price, and as old orders are completed working forces are reduced ; but there is no epidemic of bankruptcies, no run upon banks, and no spasmodic interruption of the ordinary business processes. At the opposite extreme from crises of this mild order stand the crises which degenerate into panics. When the process of liquidation reaches a weak link in the chain of interlocking credits and the bankruptcy of some conspicuous enterprise spreads unreasoning alarm among the business public, then the banks are suddenly forced to meet a double strain — a sharp increase in the demand for loans, and a sharp increase in the demand for repayment of deposits. If the banks prove able to honor both demands without flinching, the alarm quickly subsides. But if, as has happened twice in America since 1890, many solvent business men are refused accommodation at any price, and if depositors are refused payment in full, the alarm turns into panic. A restriction of payments by the banks gives rise to a premium upon currency, to hoarding of cash, and to the use of various unlawful substitutes for money. A refusal by the banks MITCHELL: BUSINESS CYCLES 577 to expand their loans, still more a policy of contraction, sends interest rates up to three or four times their usual figures, and causes forced suspensions and bankruptcies. There follow appeals to the government for extraordinary aid, frantic efforts to import gold, the issue of clearing-house loan certificates, and an mcrease of bank-note circulation as rapid as the existing system permits. Collections fall into arrears, domestic-exchange rates are dislocated, workmen are discharged because employers cannot get money for pay-rolls or fear lest they cannot get pay for goods when delivered, stocks fall to extremely low levels, even the best bonds decline somewhat in price, commodity markets are disor- ganized by sacrifice sales, and the volume of business is violently contracted. That crises still degenerate on occasion into panics in America, but not in England, France, or Germany, arises prunarily from differences in banking organization and practice. In each of the three European countries, the banking system as a whole is so organized by the prevalence of branch banking and the existence of a central bank that reserves which bear a small proportion to the aggregate demand liabilities of all the ofBces can be applied when and where they are most needed. The central bank not only carries a reserve which is far in excess of immediate requirements in ordinary times, but also uses this reserve boldly in times of stress, presenting in both these respects a marked contrast to the policy of American banks. As a result, European business men need not fear either a refusal to lend or a restriction of payments by the banks on which they depend. And panic has small chance to develop where the depositor can get his money at need and the solvent business man can borrow. 4. Depression The close of a panic is usually followed by the re-opening of numerous enter- prises which had been shut during the weeks of severest pressure. But this prompt revival of activit}^ is partial and short-lived. It is based chiefly upon the finishing of orders received but not completely executed in the preceding period of prosperity, or upon the effort to work up and market large stocks of materials already on hand or contracted for. It comes to an end as this work is gradually finished, because new orders are not forthcoming in sufficient volume to keep the mills and factories busy. There follows a period during which depression spreads over the whole field of business and grows more severe. Consumers ' demand declines in consequence of wholesale discharges of wage-earners, the gradual exhaustion of past savings, and the reduction of other classes of family incomes. With consumers' demand falls the business demand for raw materials, current supplies, and equipment used in making consumers' goods. Still more severe is the shrinkage of investors' demand for construction work of all kinds, since few individuals or enterprises care to sink money in new business ventures so long as trade remains 578 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA depressed and the price level is declining. The contraction in the physical volume of business which results from these several shrinkages in demand is cumulative, since every reduction of emplo}Tnent causes a reduction of con- sumers' demand, and every decline in consumers' demand depresses current business demand and discourages investment, thereby causing further discharges of employes and reducing consimiers ' demand once more. With the contraction in the physical volume of trade goes a fall of prices. For, when current orders are insufficient to employ the existing equipment for production, competition for what business is to be had becomes keener. This decline spreads through the regular commercial channels which connect one enterprise with another, and is cumulative, since every reduction in price facilitates, if it does not force, reductions in other prices, and the latter reductions react in their turn to cause fresh reductions at the starting point. As the rise of prices which accompanied revival, so the fall which accom- panies depression is characterized by certain regularly recurring differences in degree. Wholesale prices fall faster than retail, the prices of producers ' goods faster than those of consumers* goods, and the prices of raw materials faster than those of manufactured products. The prices of raw mineral products follow a more regular course than those of raAv forest, farm, or animal products. As compared with general index numbers of commodity prices at wholesale, index numbers of wages and interest on long-time loans decline in less degree, while index numbers of discount rates and of stocks decline in greater degree. The only important group of prices to rise in the face of depression is that of high-grade bonds. Of course the contraction in the physical volume of trade and the fall of prices reduce the margin of present and prospective profits, spread discoin-age- ment among business men, and check enterprise. But they also set in motion certain processes of readjustment by which depression is gradually overcome. The prime costs of doing business are reduced by the rapid fall in the prices of raw materials and of bank loans, by the marked increase in the efficiency of labor which comes when employment is scarce and men are anxious to hold their jobs, and by closer economy on the part of managers. Supplementary costs also are reduced by re-organizing enterprises which have actually become or which threaten to become insolvent, by the sale of other enterprises at low figures, by rediiction of rentals and refunding of loans, by charging off bad debts and writing down depreciated properties, and by admitting that a recapital- ization of business enterprises — corresponding to the lower prices of stocks — has been effected on the basis of lower profits. While these reductions in costs are still being made, the demand for goods ceases to shrink and then begins slowly to expand — a change which usually comes in the second or third year of depression. Accumulated stocks left over from prosperity are gradually exhausted, and current consumption requires MITCHELL: BUSINESS CYCLES 579 current production. ClotMng, furniture, machinery and other moderately durable articles which have been used as long as possible are finally discarded and replaced. Population continues to increase at a fairly uniform rate : the new mouths must be fed and the new backs clothed. New tastes appear among consumers and new methods among producers, giving rise to demand for novel products. Most important of all, the investment demand for industrial equip- ment revives ; for though saving may slacken it does not cease, with the cessation of foreclosure sales and corporate re-organizations the opportunities to buy into old enterprises at bargain prices become fewer, capitalists become less timid as the crisis recedes into the past, the low rates of interest on long-term bonds encourage borrowing, the accumulated technical improvements of several years may be utilized, and contracts can be let on most favorable conditions as to cost and prompt execution. Once these various forces have set the physical volume of trade to expanding again, the increase proves ciunulative, though for a time the pace of growth is kept slow by the continued sagging of prices. But while the latter maintains the pressure upon business men and prevents the increased volume of orders from producing a rapid rise of profits, still business prospects become gradually brighter. Old debts have been paid, accumulated stocks of commodities have been absorbed, weak enterprises have been re-organized, the banks are strong — all the clouds upon the financial horizon have disappeared. Everything is ready for a revival of activity, which will begin whenever some fortunate circumstance gives a sudden fillip to demand, or, in the absence of such an event, when the slow growth of the volume of business has filled order books and paved the way for a new rise of prices. Such is the stage of the business cycle with which the analysis began, and, having accounted for its own beginning, the analysis ends. Note The Relation of the Preceding Theory of Business Cycles to the Theories Reviewed in Chapter I When viewed in the light of the preceding analysis, none of the theories of business cycles summarized in Chapter I seems to be demonstrably wrong, but neither does any one seem to be wholly adequate. Perhaps an effort to suggest the limitations of each theory may throw addi- tional light upon a problem which is dark enough at best— certainly such an effort will show how much the present discussion has borrowed from its predecessors. Beveridge's theory, that the competitive eifort of each producer to engross as much of the market as possible for his own wares necessarily leads to gluts, puts all the stress upon a single feature in a set of processes which have been shown to be exceedingly complex. To do Mr. Bev- eridge justice, he is far from professing to advance an adequate theory of crises. And the one factor which he does emphasize certainly counts in the sense that the whole course of business cycles would be profoundly altered if competition between producers were completely suppressed, 580 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA But the claims freely made a decade since, both in America and Germany, that the development of trusts and cartels would put an end to crises, have not been sustained by business history. The industries in which combination has made greatest strides toward regulating competition still feel the stress caused by the increasing cost of labor and by tension in the investment and money markets. Nor have the managers of these great combinations been able to avoid a reduction of profits from waning demand for their products when prosperity has passed its zenith. The various forms of the under-consumption theory have already been criticized. Their value lies in showing one of the possible obstacles in the way of preventing the encroachments of costs upon profits. But it has never been proven that consumers' demand falls behind supply before a crisis has begun. And whatever may be the facts of this case, there is evidence that the strains which have actually precipitated the crises of recent years have appeared earlier in other branches of trade than those which cater to the wants of consumers.^ Spiethoff 's theory of the ill-balanced production of industrial equipment and of complementary goods supplies two elements in the preceding discussion. But here these elements have been given a somewhat different setting. The under-production of complementary goods appears in the guise of an increase in the costs of materials, labor, etc., so rapid that it threatens to reduce pros- pective profits. The over-production of industrial equipment appears as one of the obstacles in the way of advancing selling prices sufficiently to offset this increase in costs. If this setting helps to make the bearing of Spiethoff 's analysis clearer, it also serves to show that other elements besides those upon which he enlarges must be taken into account. Hull's theory that the high cost of construction work in periods of intense prosperity causes a severe decline in investment demand and hence a crisis, which spreads from such industries as the steel trade to all branches of business, has been incorporated into the preceding analysis. But there it is combined with numerous other ideas which Mr. Hull has neglected. Lescure's theory of variations in prospective profits combined with Veblen's theory of the discrepancy between prospective profits and current capitalization affords the general framework of Chapter XI. But the analysis of these two writers has been developed by the aid of sugges- tions drawn from other sources, and an attempt has been made to test certain of their assumptions by the use of statisical materials. Among the suggestions thus utilized are those made by Sombart, Carver, and Irving Fisher. While all three suggestions belong in an analysis of the way in which prosperity engenders a decline of prospective profits and thus undermines the basis of credit, no one of them can properly stand alone. Stresses within the system of prices may well arise, as Sombart holds, because the supply of organic goods does not keep the same pace as the supply of minerals and the like; but, unless the preceding analysis is sheer imagination, there are other factors at work, more regular in their operation than the uncertainties of the harvests, and not less potent in encroaching upon profits. Carver's theory of the dissimilar price fluctuations of producers' and consumers' goods is another way of explaining the fact that prosperity brings on a rapid increase of industrial equip- ment, and that a crisis occurs when the increasing supply of goods cannot be sold at a profit. Of course this feature of business developments has been taken into account; but it is far from standing alone — a conclusion which Mr. Carver would be prompt to recognize were he dealing with the problem on a more extended scale. Likewise, the lagging adjustment of interest rates to the fluctuations of the price level, utilized bj^ Mr. Fisher to explain the occurrence of crises, is only one among several factors which widen the margins of profit in the early stages of prosperity and narrow them at a later stage. Finally, incidental use has been made of Mr. Johannsen's theory of "impair savings." That is, it has been recognized in Chapter XIII that investments in refunding bonds, in the securities 1 See Chapter XI, iv, 2, D. MITCHELL: BUSINESS CYCLES 581 of companies which are undergoing reorganization, and in properties sold under foreclosure, have no such stimulating effect upon business as investments in new industrial equipment. It is in part — but only in part — because investments of the former type predominate in the months succeeding a crisis that the current volume of production falls off. While the proof sheets of this chapter were in my hands, Mrs. Minnie Throop England's preliminary sketch of her projected theory of crises appeared ("Economic Crises," Journal of Political Economy, April, 1913). Mrs. England seems to have formulated the problem in much the same way that I have done, to have employed like methods, and to have reached broadly similar conclusions. II. Diversities Amokg Business Cycles and Their Causes Any analysis which traces the general course of the processes bringing about prosperity, crisis, and depression, inevitably leaves a misleading impression of uniformity among business cycles. As a matter of fact these cycles differ widely in duration, in intensity, in the relative prominence of their various phenomena, and in the sequence of their phases.^ 1. The Diversities If the years between one crisis and the next be taken as the length of a business cycle, the English, French, and German cycles beginning in 1890 lasted ten years, and those beginning in 1900 lasted seven years. The contemporaneous American cycles have shown wider variations: three years from 1890 to '93; ten years from 1893 to 1903 ; and four years from 1903 to '07. In view of these diversities, the notion that crises have a regular period of recurrence is plainly mistaken. That business cycles do not always consist of a period of unruffled prosperity, of a well-defined crisis, and of uninterrupted depression is shown by American experience in 1893-1903. Depression was broken by the revival in 1895, and then aggravated by the extreme monetary stringency of 1896. The revival which began in 1897 was interfered with for a short time by the outbreak of war with Spain in the spring of 1898. The prosperous phase which followed was marred by the stock-exchange troubles of 1899 and 1901, and by the tem- porary slackening of general business in 1900. Of examples of differences in intensity, the contrast between French and American cycles is the most striking. But even within the limits of one country, successive cycles bring relatively mild crises like those of 1890 and 1903 in America and severe panics like those of 1893 and 1907; relatively brief and moderate periods of depression like those of 1891 and 1904, and relatively long and drastic ones like that of 1894-96 ; relatively transient periods of prosperity like those of 1892 and 1909, and relatively long periods of intense prosperity like those of 1898-1902, and 1905-07. 2 Compare ' ' The Framework of Part III. 582 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Finally, no two periods of prosperity, crisis, or depression show just the same combination of elements. Speculation is sometimes rampant during pros- perity as in America in 1901, and sometimes held firmly in check as in England in 1906-07. A contraction of credit is often the most conspicuous feature of crises, as in the American panics of 1893 and 1907 ; while at other times it plays a minor role in comparison with the declining volume of new business, as in the British crisis of 1907. Different branches of trade and different sections of the country are found to be the chief seats of activity, the chief sources of stress, and the chief sufferers from depression in successive cycles. Indeed, dissimilari- ties of this type are so numerous and so obvious that it is not worth while to cite more than these few examples. 2. Their Causes Many of these divergences among business cycles are due to events which arise from other than business sources. For the mechanism of the money economy is so delicate that someone 's prospects of profits are affected by every day's news. Most important of all these extraneous factors in the long run are the chances of the weather which make crops good or bad, and so affect the prices of farm products, the purchasing power of agricultural communities, the earnings of "granger" railways, etc., etc. The making of war or of peace, disturbances of domestic order, earthquakes, conflagrations, epidemics, changes in monetary standards, tariff revisions, governmental policies regarding corpora- tions, alterations in the gold output, improvements in industrial techniqtie, the opening of new lands to settlement, the depletion of natural resources, the shifting of trade routes, — these and a thousand other things can scarcely fail of helping or hampering some business venture. If the circle which they reach be large and their effects pronounced, they doubtless give a peculiar twist to the business cycle within which they fall. Particularly in times of transition from one phase of the cycle to another, when the set of the current is uncertain, the influence of such events is often marked. But in the midst of prosperity, of crisis, or depression, it often seems as if the business community pays no heed to news which does not accord with the tenor of the time. Less obvious but more persisting in their effect upon the course and character of business cycles are the changes continually occurring in business organization and practice, and in the relative importance of different industries. For example both the extravagance of "booms" and the violence of panics have been tempered by closer organization, wider knowledge, and firmer policies among the banks. Again, the rapid development of manufacturing and the decline of railway building in rank among American industries have helped to make the business cycles of 1900-10 different from those of 1880-90. Once more, the increasing dominance of large corporations which rely upon the investing public for their MITCHELL: BUSINESS CYCLES 583 funds gives greater influence to the markets for bonds and stocks than these markets exercised in the days of family enterprises. The broad contrast between French and American cycles shows how powerfully the relative development of thrift or of enterprise affects the intensity of both prosperity and depression. Other changes which react upon business cycles are the extension of monopoly control, the integration of industry, the organization of labor with its standard- ization of wage rates, and in general the readjustment of business to meet changes in the material, political, or social environment. The reaction of such contemporary changes in economic organization upon the character of successive business cycles may be difficult to trace. But each new change accomplished becomes the basis upon which further change proceeds. That is, the broad changes of economic organization are cumulative, like the lesser changes which make each phase of every business cycle evolve into its successor. And, being cumulative, their dominating influence upon the phenomena of business cycles stands out clearly in the lapse of years. Hence it is probable that the economists of each generation will see reason to recast the theory of business cycles which they learned in their youth. III. Business Cycles in Economic Histoey 1. The Genesis of Business Cycles If the term economic crisis be made to cover any serious disturbance of the usual processes of producing and distributing goods, then such crises are at least as old as economic records. Destructive "acts of Grod" and the wasteful wrath of man often brought acute distress upon communities of industrious people long before economic organization assumed its present form and business cycles began to run a regular course. More modern in their character were the disturbances which followed the organization of credit. By the sixteenth century, for example, the public debts of Prance, Spain, Austria, etc., had attained such development that royal repudiations became a prolific source of financial crises in centers like Antwerp and Lyons." The rise of banking exposed mercantile circles to still other dangers. The goldsmith bankers in London, to cite specific instances, were subjected to runs and their patrons to panics when the Dutch burnt the English fleet at Chatham on the Thames in 1667, and again in 1672 when Charles II stopped payments from the Exchequer. But, though such episodes may fairly be called financial crises, they differ from their recent counterparts both in the limited number of trades which they affected and in their direct dependence upon war or the fiscal embarrassments of government. 3 See the second volume of E. Bhrenberg's Das Zeitalter der Fugger, Jena, 1896. 584 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Even in the eighteenth century most of the English crises arose from other than business sources — though by this time England had definitely assumed the leadership in economic organization. In 1708 the goldsmith bankers took advantage of reports of Jacobite plots and of preparations in Prance for a descent upon Scotland to attack the credit of the Bank of England. In 1720 the South Sea Bubble burst, ending an almost incredible mania of speculation in stocks. The next crisis occurred in 1745, when the Pretender with his High- landers penetrated within 120 miles of London. The end of the Seven Years' War was followed in 1763 by lively speculation and collapse upon the Stock Exchange. Again in 1771-73 the making of peace led to speculation and a crash. Pive or six years later losses brought on by the war with the American Colonies caused serious business difficulties. When this war ended, in 1783, peace once more gave rise to a sudden expansion of business and the expansion ended in a crisis. Finally, in 1793, came what the historian of these events calls the first of England's great industrial crises, followed by depression in general business.* This brief recital indicates that business cycles are much later in appearing than economic, or even strictly financial crises. In England itself they seem not to have begun before the close of the eighteenth century. But when they did appear, it was in the form of an extension over all branches of industry of difficulties not unlike those which had been suffered for more than a hundred years by large capitalists, bankers, and speculators in stocks. With this exten- sion in scope came a shifting in the relative importance of the causes. In the past, the undermining of credit had usually been caused by war, by the making of peace, or by some violation of financial obligations on the part of govern- ment. In the future, the undermining of credit was to be caused more frequently by stresses engendered within the world of business itself. The reason for both of these changes lay in the gradual extension of the highly organized business enterprise from its earlier centers of foreign com- merce, mining, finance, and banking over the wide field of manufacturing and domestic trade — an extension which accompanied the Industrial Revolution. As handicraft gave place to factories managed on business principles, catering to a wide and imcertain market, entering freely into long-term contracts,, requii'ing a heavy investment of fixed capital, and using borrowed money on a liberal scale, the circle of enterprises affected by financial difficulties grew steadily larger, and the danger that financial difficulties would arise from the conduct of business affairs grew steadily greater. Moreover, as manufacturing and domestic trade became dependent upon the money and investment markets, crises began regularly to be followed by periods of liquidation in manufacturing and mercantile circles. But since the financial difficulties now arose largely from the embarrassment of manufacturers 4 Mentor Bouniatian, Studien zur Tlieorie und Geschichte der Wirtschaftslcrisen, vol. II; Geschichte der Handels- hrixen in England, 1640-1840, Munich, 1908, chapters 3-6. MITCHELL: BUSINESS CYCLES 585 and merchants, a thorougli-going liquidation on the part of the latter ended the conditions which had caused the crisis and paved the way for a resumption of business activity. And since both the accumulation and the relaxing of these stresses came about regularly as a by-product of business processes, the irregular, unpredictable crises of the past turned gradually into the cycles of prosperity, crisis, and depression upon which men have come to count and which they are beginning to forecast. In proportion as the Industrial Revolution and its concomitant changes in the organization of commerce and transportation spread to other countries, the latter began to develop the phenomena of business cycles already familiar in England. And in proportion as the business enterprise completed its domina- tion of manufacturing, wholesale trade, finance, transportation, mining, and lumbering, and began to invade retail trade, the professions, and agriculture, the cyclical oscillations of expansion and contraction brought ever larger numbers of men under their immediate sway. 2. Man's Mastery over the Workings of the Money Economy Business cycles, then, make their appearance at that stage of economic history when the process of making and distributing goods is organized chiefly in the form of business enterprises conducted for profit. This form of economic organization has been gradually developed out of earlier forms by successive generations of men who have thought to gain some advantage from each successive step. But the complicated machinery of the money economy has never been wholly under the control of its inventors. The workings of the system are not fuUy mastered even by the present generation of business men, and recurrently the financial machinery inflicts grave suffering upon us who use it. Because we have not learned how to prevent costs from encroaching upon profits and stringency from accumulating in the money markets, how to keep steady the construction of new industrial equipment, how to control the market capitalization of business enterprises, and how to avoid spasmodic expansions and contractions of credits— because our theo- retical knowledge and our practical skill are deficient regarding these technical matters, we cannot maintain prosperity for more than a few years at a time. Nevertheless, within the past century, we have made incontestable progress toward mastery over the processes of the money economy. The Tulip Mania in HoUand, the South Sea Scheme in England, and the Mississippi Bubble in France have no worthy rivals in recent decades. Even the speculative excitement which preceded the crisis of 1873 in the German states and in America has scarcely been equalled since 1890. By a combination of various agencies such as public regulation of the prospectuses of new companies,-legislation supported by efficient administration against fraudulent promotion, more rigid require- ments on the part of stock exchanges regarding the securities admitted to official lists more efficient agencies for giving investors information, and more conserva- 586 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA tive policy on the part of the banks toward speculative booms, we have learned to avoid certain of the rashest errors committed by earlier generations. Again, from hard experience, European banks at least have learned methods of con- trolling a crisis and preventing it from degenerating into a panic. The ' ' integra- tion of industry" has also done something, though less than is often claimed, toward steadying the course of business both by concentrating power in the hands of experienced officials, and by moderating the extreme fluctuations of prices. 3. Proposals for Controlling Business Cycles What has been already accomplished in these directions toward controlling our business machinery may well be the earnest of greater achievements in the future. Three promising lines of effort are presented by the proposals to re-organize the American banking system, to use governmental and railway purchases as a business balance wheel, and to "stabilize the dollar." The first proposal aims primarily at preventing crises from degenerating into panics. The feasibility of accomplishing this aim has been proven by European and Canadian experience, and practical plans have been worked out in detail by the Monetary Commission, congressional committees, bankers' associations, and private investigators. Indeed, banking reform is both the most needed and the easiest to accomplish among all the changes w^hich promise to increase our control over the workings of the money economy. But the literature upon this subject is so large and so accessible that there is no need to go into detail in this book. The second proposal, to use govei'umental and railway purchases as a balance wheel to steady the business mechanism, aims primarily at mitigating the severity of depressions. It has been formulated most definitely in France and in England. In 1907 the French Minister of Public Works directed that inquiry be made concerning the effect of crises upon railways. The report argued that it is feasible for the great railway systems to distribute their orders for rolling stock, etc., systematically over the full period of a business cycle in such fashion as to reduce the volume of orders now placed in busy years and to increase the volume in dull years. This change would be to the finnacial advantage of the railways in that equipment is cheaper to build in years of depression, to the advantage of shippers in that a more timely provision of rolling stock would diminish the frequency of freight blockades and car famines, and to the advantage of the public in that the plan would make employment steadier in an important industry. By way of applying these ideas the Minister of Public Works in May, 1907, invited the railways to submit a definite pro- gramme for the purchase of rolling stock covering the years 1907-1910.° 5 Notice sur la periodicite des crises economiques e ses rapports avee Sexploitation des ehemins de fer frangais. Minitere des Travaux Public. Paris, December, 1907. Quite independently, Mr. Carl Snyder has suggested the financial advisabilitj' of much the same policy for the American railways. New York Globe and Financial Advertiser, .January 3, 1913. MITCHELL: BUSINESS CYCLES 587 More ambitious in scope and different in emphasis is the scheme worked out by Mr. and Mrs. Sidney Webb. As part of a comprehensive plan for the prevention of destitution, they propose that a portion of government contracts be held back in years of intense activity and let out in slack years. Dr. A. L. Bowley's figures, on which they rely, indicate that if only 3 or 4 per cent of the government's orders were treated in this fashion, a very large part of the unemployment now caused by cyclical depressions might be counterbalanced. Among the items which could.be relegated to a ten years' programme, and put to contract only when trade showed signs of falling off, they mention: "... one-half of the yearly appropriation for rebuilding and multiplying . . . government buildings . . .; one-half of the normal annual provision for such stores as blankets, canvas, and khaki cloth, of which there is always a large stock ; the whole (or one-half) of the sum allocated annually to the gradual placing of telegraph wires underground, and the gradual extension of the telephone into every little village ; the whole of such printing as the reports of the Historical Manuscripts Commission, and the official history of the South African War; at least one-half of the annual expenditure on developing the Government forests . . . ; a considerable proportion of the Board of Education grants for the building of new training colleges and secondary schools; some part of the year 's normal shipbuilding . . . ; at least one-half of the annual appropriation for new rifle ranges and drill halls for the Territorial Force; most of the capital expenditure of the Congested Districts Board in Ireland, and so on. And to this should be added, the whole of the sums, amounting to more than a million a year, already placed at the disposal of the Development Commissioners and the Road Board. It is very clear [they conclude] that there is, in the aggregate, a very large amount — out of which the total of four millions a year could easily be selected — and a very considerable variety of expenditure which could, without any appreciable inconvenience, be rearranged within the decade. "^^ Finally, if Professor Irving Fisher's ingenious plan of "stabilizing the dollar" were adopted, and if it succeeded in keeping fluctuations of the price level within narrow-limits, the course of business cycles would doubtless become more even than at present. For if every rise or fall in commodity prices were checked promptly, one of the chief factors now causing changes in the prospects of profits would be practically removed. Of course there might still occur unequal changes in the relative prices of raw materials and finished products, of consumers' goods at wholesale and retail, or of labor and loans, which would affect profit margins without disturbing in equivalent degree the general index number used as a basis for compensating the dollar. Profits would also be subject to changes arising from variations in the volume of business, in the saTfte Prevention of Destitution (London, 1912), pp. 118, 119. Consult also the references given on p. 157. Compare B. S. Eowntree and B. Lasker, Unemployment (London, 1911), pp. 306-308. 588 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA efficiency of labor, etc. But since the magnitude of the effects now produced by these factors results from their cimiulative action in heightening each other's intensity, the paralyzing of one potent factor would render the others also less potent. The feasibility of carrying out these proposals, aside from banking reform, has not been demonstrated on a large scale. Certainly all three plans merit careful consideration. They are brought forward in this place, however, merely for the purpose of suggesting concretely possible ways in which man's control over the workings of the money economy maj^ be increased in the future. Apart from such specific reforms in economic organization, progress lies in the direction of bettering our forecasts of business conditions. For when coming troubles are foreseen they may be mitigated often, and sometimes averted. IV. The Foeecasting of Business Conditions The uncertainty attending present forecasts of business conditions arises chiefly from the imperfections of our knowledge concerning these conditions in the immediate past and in the present. For, since business cycles result from processes of cumulative change, the main factors in shaping tomorrow are the factors at work yesterdaj^ and today. Now the money economy affords most unequal insight into its own workings to different classes of business men. These inequalities open a rich source of profit to the favored class, and their efforts to make the most of their chances may increase the violence of crises. One way of increasing social control over economic activity is therefore to democratize the knowledge of current business conditions already possessed by a few. But the ways and means to this end can be discussed better after the present inequalities of knowledge and their conse- quences have been set forth. 1. The Exceptional Opportunities of Certain Financiers Concerning the business condition of crucial importance — fluctuations in profits — it is especially difficult to secure prompt, reliable, and wide information. There are certain men so placed in the business world, however, that they have a wide outlook over profits, and so trained that they can draw fairly safe conclu- sions concerning the trend of the changes going forward. The greater capitalists who are actively participating in many enterprises and who have intimate per- sonal relations with other captains of industry are in this position of vantage, and so also are the managers of -the largest banks. Doubtless the information at the disposal of even these men at the center of the financial system leaves much to be desired in scope and accuracy. Doubtless the inferences which thev draw MITCHELL: BUSINESS CYCLES 589 are warped by their personal equations and the forecasts wMch they make are measurably divergent. But could these gentlemen be induced to publish frankly what they know concerning the present and what they really expect in the near future, it is probable that the concensus of their opinions would seldom prove far wrong. However, this superior foresight is a business asset of too much value to be given away. The man of large means who can make trustworthy forecasts of the coming of a crisis is able to shift his holdings in such fashion as to avoid losses which will fall upon the unwary and to make profits by having funds in hand for buying property at bargain prices. Not until his own affairs have been thus arranged is he likely to take the public into his confidence. When he does speak it may well be with a view toward influencing the trend of senti- ment among lesser business men and investors to his own advantage. The public, therefore, has good reasons for reading the interviews which prominent finan- ciers occasionally give out in a highly critical spirit. The advantage enjoyed by this small group of major financiers is not limited to superior opportunities for foreseeing approaching changes. In a measure they can control the events they forecast. This ability arises chiefiy from the increasing centralization of power to grant or withhold credits. On the one hand, the rise of the great corporation has made the business enterprises of strategic importance dependent upon the metropolitan markets for loans and securities, rather than upon local banks and investors. On the other hand, the great banks, insurance companies, and investment houses which dominate the financial markets of New York, London, Paris, and Berlin have developed intimate relations with each other, and can be controlled by a few small coteries of financiers. To these men is therefore given a large measure of power over the granting of bank loans, the floating of new securities, and the prices of outstanding stocks and bonds. This power they can use, if they choose, to increase the stresses which prosperity breeds. If they lock up large sums of money, for example, they reduce the reserves of banks and precipitate the downward revision of credits with which a crisis begins. If they block corpor- ations from raising loans needed to meet maturing obligations, they force the appointment of receivers, beat down the price of stocks, and create a sentiment of distrust which produces further consequences of its own. What little is known of the "inside workings of high finance" indicates that this power has not yet been exercised with the ruthless efficiency of which it is susceptible. Doubtless many great business men would recoil from the idea of deliberately aggravating a crisis for their own gain. Moreover, the financiers who have most power over credit are often heavily interested in industrial enter- prises, and fear to lose dividends in the period of depression which would follow a crisis. A third deterrent is the obsession of the dollar as a stable measure of value. So accustomed do business men become to treating the dollar as constant 590 MEMOIRS OP THE UNIVERSITY OP CALIFORNIA and imputing all changes in prices to fluctuations in the value of the goods quoted, that they do not readily grasp the money profit to be made out of changes in the general level of prices. Finally, even in the highest circles of finance; centralization of power has not yet gone far enough to guarantee unanimity of action." Among these deterrents from the effort to aggravate the fluctuations of business conditions, two at least seem to be losing their force. The increasing mobility of investments is making it easier for financiers to extricate their funds from industrial entanglements and put them into such form that a period of depression can bring no serious loss. And the continual fluctuations in the price level are ever demonstrating that dollars are shifting units, out of whose fluctuations profits may be made. It is therefore quite possible that financiers may exploit their opportunities for aggravating crises with greater energy in the immediate future than they have done in the recent past.'' If their efforts in this direction become more energetic, it may be expected that the old-fashioned capitalists who are interested primarily in the uninter- rupted conduct of industrial operations will join with the great numbers of smaller business men to safeguard themselves from raids upon credit. Probably the demand for government regulation, which is directed at present chiefly toward regulation of railway and industrial corporations, would then be extended to regulation of all the financial operations concerned with the granting of loans. But it is not yet clear precisely how government could intervene to prevent powerful groups of financiers from locking up money when they saw fit, from refusing banking accommodation when they chose, or from declining to underwrite new issues of securities for corporations out of favor. Indeed, the increase of government regulation in industry may make the most aggressive capitalists more eager to interest themselves primarily in finance and to exploit to the utmost their opportunities of manipulating credit. In that case a second line of defence may be followed by many whose business interests are jeopardized. If reliable information concerning profits and credits, such as now exists in partial form and in few hands, were collected and published, the strategic advantage of the great financiers in forecasting crises would be materially reduced. For then everyone interested could take such measures of precaution when prosperity was seen to be breeding a crisis as his affairs required and his judgment suggested. Indeed, everyone within the measure allowed by his pecuniary resources might endeavor to turn the coming crisis to 6 In New York, for example, there appear to be several groups of powerful financiers, each group more or less firmly cemented together by family ties and business interests, but changing from time to time in personnel, in relative prestige, and especially in their relations with the other similar groups. Ordinarily each group acts more or less independently, and frequently one group engages in a bitter contest with some rival. Sometimes such contests bring about grave disturbances in the business world, as when the fight between the Hill and Harriman interests for the control of the Burlington railroad led to the Northern Pacific corner of May, 1901. But at other times the lack of concerted action is a factor of safety in that it lessens the control which any single power can exercise over the financial markets. ■^Compare Veblen, Theory of Business Enterprise, pp. 206-209; Edmond Kelly, Twe7itieth Century Socialism (New York, 1910), Book II, Chapter VI. MITCHELL: BUSINESS CYCLES 591 his own profit — a situation which would result in few being caught at a disad- vantage. The field left open for predatory exploitation by financiers would be reduced to the production of sudden contractions of credit of which the statistics of profits and credits had given no warning. That is to say, these campaigns would run counter to the general trend of business developments and would therefore be far less destructive than campaigns reinforced by the stresses accumulated by prosperity. But all this concerns a problematical future. How do matters stand with the business public at present 1 2. The Business Barometers Available to the Public The American man of affairs who seeks to keep informed about the trend of business conditions at large relies upon the financial colmnns of his daily paper, supplemented perhaps by one or two of the financial weeklies and a special trade journal. The data which he can compile from these sources cover a considerable range. Commodity prices at wholesale are represented both by actual quotations for the great staples of commerce and by index numbers like Bradstreet's. The prices of loans on call and on time for thirt}^ days to six months are reported for I^ew York, together with the market and bank rates in London, Paris, and Berlin. The prices of securities dealt in on the New York exchange are pub- lished in detail, and to show the general trend of the market there are convenient records such as the Wall Street Journal's average actual prices of twenty rail- way and twelve industrial stocks. Fluctuations in the volume of business must be estimated from various sources: bank clearings, railway gross earnings, number of idle cars, imports and exports, coal, copper, pig-iron, and steel output, shipments of grain, cotton, live stock, etc. Government crop reports help to forecast the probable state of trade in various agricultural sections. Less systematic but often helpful are the numerous reviews of business conditions in different trades and different cities published at regular intervals by several weekly papers. Information about the currency is supplied by the official estimates of the monetary stock, by reports of gold imports and exports, by the recorded move- ments of money into and out of the ISTew York banks, and by the figures concern- ing production and industrial consumption of gold, and the distribution of money between the banks and the public — though these last three statements come but once a year. Regarding the banks there are telegraphic statements from the central institutions of Europe, weekly reports from the clearing- houses of New York, Boston, and Philadelphia, five reports a year from the national banks, and a variety of official and private reports of banks organized under state laws. 592 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA Some idea of the volume of investment and speculation going on may be obtained from the transactions of the New York Stock Exchange, the number of building permits granted, the mileage of railway under construction, and from the less systematic news items concerning fresh contracts let, security issues offered to the public, and the like. Last and most important, the prospects of profits are best shown for the railways, whose gross and net earnings are published and commented upon with unfailing interest. The earnings of the United States Steel Corporation prob- aMy stand second in general esteem. Then comes a miscellaneous mass of information supplied b}^ such reports as the large corporations engaged in various branches of mining, manufacturing, and banking choose to make public. The other side of the shield is shown by the statistics of bankruptcy compiled "\^'eekly by two great mercantile agencies. Though far from complete, this list of materials for gauging the trend of business conditions is long. In fact, it is all too long for the average business man. To compile and to anatyze the available data requires more time, more effort, more statistical skill, or more analytic ability than most men have to spend on the task. Hence the typical man of affairs skips the bewildering evidence and reads only the summary conclusions drawn by the editor of his financial paper or by the forecasting agency to which he subscribes. That the studying of business barometers and the forecasting of business weather has itself become a profitable business affords convincing proof at once of the need aud the difficulty of using effectively materials published to all. It is from such specialists, rather than from the average merchant and manufacturer, that we may expect the improving and disseminating of the information required as a basis for perfecting social control over the workings of the money economy. Now, these professional forecasters attached to the staffs of financial papers, investment houses, and the like do not find the data already at hand too elaborate. They have the time and the patience, they will acquire whatever they now lack of statistical technique and analytical skill to extract the essence from large masses of data. What they most need to improve their forecasts is more exten- sive and more reliable materials to work upon. But it is also quite possible to better the use they make of data already available. In the next section certain suggestions are offered for the making of 'new and the bettering of old business barometers. Since they have grown out of an effort to understand recent C3^cles, these suggestions may be of service to professional business forecasters if not to the business public. MITCHELL: BUSINESS CYCLES 593 3. Suggestions for Bettering Business Barometers A. NEW BAE0METER8 NEEDED Among the most needed additions to the list of American business barometers are the following : A general index number of the physical volume of trade could be made from data showing the production of certain staples, the shipments or receipts of others, the records of foreign commerce, and similar sources. Professor Irving Fisher has shown that much material for this purpose' is already incidentally provided in official documents,^ and doubtless much more could be had for an enquiry which did not go back of 1900 or 1905. Separate averages should be struck for the great departments of industry, since the differences between the relative activity in different lines would often be not less significant than the computed changes in the total. So far as feasible these sub-divisions of the index number of the physical volume of trade should be made to correspond with those of the wholesale-price index. Mr. Hull's plan for obtaining reports concerning the voliune of contracts let for construction work and the percentage of w^ork performed upon old contracts merits careful consideration." Since it comes from a man intimately acquainted with the business, the feasibility of the plan cannot be lightly denied. Few sets of figures would give more insight into business conditions when prosperity was verging toward a crisis or when depression was engendering prosperity. An index number of the relative prices of bonds and corresponding figures showing changes in interest rates upon long-term loans would not be difficult to prepare." Even if standing alone, these two series would possess great value as reflecting the attitude of investors; but they would be still more useful if accompanied by data concerning the amount of bonds and short-term notes put upon the market by business enterprises and by governments, whether central or local. Certain states — notably New York and Massachusetts — have made a begin- ning in the direction of providing statistics of unemployment. But we have no comprehensive data of this kind comparable with those provided by England, France, and Germany. Their value, not only as an index of welfare among wage-earners, but also as reflecting changes of activity within important indus- tries and changes in the demand for consumers' goods is such as to make the present lack a matter of general concern. s See the Appendix of his Purchasing Power of Money. 9 George N. Hull, Industrial Depressions (New York, 1911). 10 Compare Chapter IV, iii, 1, and iv, 6, above. Since this chapter was written the New YorTc Times Annalist has made a beginning in this direction. 594 MEMOIRS OF THE UNIVERSITY OP CALIFORNIA Most to be desired of all are statistics which would show the relative fluctua- tions of costs and profits. Unhappily, the difficulties both theoretical and prac- tical in the way of obtaining such figures are particularly grave. But certainly ever}^ extension of public authority over corporate activity should be utilized to secure such uniform methods of accounting as have been imposed upon the interstate railways, and the reports obtained by the government should be made available in some significant form for the information of the business public. Finally, the information practically available in forecasting business con- ditions could be materially increased by prompter publication of many of the data supplied by the government. In numerous eases extremely valuable figures are not given to the press until they have become matters of historical interest rather than current news. B. THE IMPROVEMENT OP OLD BAEOMETERS The index numbers of commodity prices at wholesale would be more useful if separate series were computed for raw materials and for the articles manu- factured from them, and if the raw materials were sub-divided into farm, animal, forest, and mineral products. The differences between the fluctuations of these several groups would be of great assistance in determining the causes, and therefore the significance, of changes in the grand total. Further, an index number of identical commodities in the United States, England, France, and Germany would facilitate the effort to follow the concomitant courses of business cycles in different countries and to anticipate the reaction of foreign upon domestic conditions. Stock prices should be computed upon the index-number plan instead of in the current form of average actual prices of shares in a selected list of corpora- tions or the aggregate market values of certain issues of securities. To facilitate comparisons the basis chosen for the index number of stocks should agree with that chosen for commodity prices. The distinctively investment stocks should be separated from the speculative favorites, and separate averages should be struck for railways, public utilities, and industrials. By proper selection of data fluctuations in the average relative prices of the industrial stocks might be made to reflect the fortunes of enterprises especially concerned with the providing of industrial equipment. In contrast, the public-utility stocks would be affected by a relatively steady consumers' demand, and railway stocks by the activity of general business. The weekly and monthly reports of clearings also would be more useful if they were accompanied by index numbers which showed the relative magnitude of the changes in actual amounts. Separate averages of these relative figures should be provided for the centers in which financial operations, industrial activity, and agricultural conditions are the dominant factors. MITCHELL: BUSINESS CYCLES 595 Banking statistics would be more instructive if the actual amounts of the leading items were supplemented by ratios not only of reserves to deposits, but also of loans to deposits. Another set of relative figures should be made to show the amplitude of the fluctuations in the leading items. If the clearing-house associations would require from their members and make public accurate returns of the receipts and shipments of currency the activity of business in various sections could be followed with greater certainty. Finally, one of the darkest points of current business conditions in America could be cleared up if the rates of discount upon first-class commercial paper in these various centers could be regularly ascertained. But perhaps no thoroughly comparable statistics of discount rates can be compiled until the varying qualities of com- mercial paper now in circulation have been standardized by permitting the national banks to accept drafts after the European fashion. To extend this list of suggestions for bettering figures of the sorts already published would be easy ; but enough has been said to make clear the character of the desirable changes. In general, the need is for more careful discrimina- tion between dissimilar data now often lumped together in a single total, the collecting from new centers of data already published for New York, more uniform methods of compilation to guarantee the comparability of what purport to be similar figures, and the computing of relative fluctuations upon a common basis. In many if not in all cases a double set of relative figures is highly desirable — one set referring to average actual amounts in some fixed decade, the other set making comparisons with the corresponding period of the pre- ceding year. C. DIFPICTJLTIES IN THE WAT When the discussion of how to improve our control over the workings of the money economy is thus brought down to practical details, the complexity of the task becomes patent. Scarcely one of the suggestions made for bettering or extending the indices of business conditions but calls to mind various obstacles which hinder the getting of trustworthy data — the reluctance of private interests to divulge information, the diversity of business practices in various trades and sections of the country, the continual changes going forward iu business organization, the alterations in the relative importance of different raw materials and still more in the kinds and qualities of manufactured prod- ucts, the technical puzzles of statistical classification and averaging, etc. In view of these difficulties, the prospect of rapid improvement in the data for business forecasting is not so bright as might be desired. The vigor of the efforts made to overcome the difficulties will depend largely upon the demands of business men for better service than they are now receiving. To-day the one class which evinces the clearest sense of the 596 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA usefulness of a comprehensive statistical survey of the business present as a basis for forecasting the business future is the class of speculators in stocks. But many men who prefer to call themselves investors, and an increasing number of brokers, bankers, merchants, manufacturers, contractors, and the like, are becoming active consumers of such reports. Since these classes can be counted upon to subscribe to those papers and confidential agencies which give them the most satisfactory service, business forecasting will doubtless become a more extensive profession, and make such progress as is possible under private initiative spurred on by competition. There are many lines of business, however, concerning which information that is both reliable and comprehensive cannot be secured by private enterprise. Whether the government will extend the scope of its present activities in this field will probably be determined chiefly by large issues of public policy. For most of the figures compiled by the government are by-products of measures taken with other ends in view than the increase of knowledge concerning the workings of the money economy. As the railway statistics are an incidental result of the interstate commerce law, the banking statistics of the national banking act., etc., so future additions to the government's statistical output will be made or not as public control over business affairs is extended or restricted. Certainly the community as a whole has a deep interest in developing this branch of the government's work. The business men who study financial journals are chiefly concerned to make profits or to avoid losses arising from the ups and downs of the markets. The community, on the contrary, is inter- ested in reducing the disturbances which these market ups and downs cause in the process of making and distributing useful goods. But so long as this process of making and distributing useful goods is subordinated to the process of making money, the community's interest in steadying the pace of economic activity can be promoted by giving all business men alike the best possible opportunities for knowing the present and forecasting the future. However, a vivid realization of what might be accomplished along this line for the general welfare is not common. More direct efforts to apply governmental agencies to the correction of what are deemed to be ill results of business enterprise make a stronger appeal to the majority of voters. Hence it is those who desire to see the present form of economic organization perfected rather than funda- mentally changed who are most concerned with pressing the demand for better governmental reporting of business conditions. V. The "Money Sueface of Things" and What Goes on Beneath The present theory of business cycles deals almost wholly with the pecuniary phases of economic activity. The processes described are concerned with changes in prices, investments of funds, margins of profit, market capitali- zation of business enterprises, credits, the maintenance of solvency, and the MITCHELL: BUSINESS CYCLES 597 like— all relating to the making of money, rather than to the making of goods or to the satisfaction of wants. Only two non-pecunidry factors command much attention— changes in the physical volume of trade and in the efiBciency of labor — and even these two are treated with reference to their bearing upon present and prospective profits. The reason for thus staying upon the "money surface of things" in analyz- ing business cycles, rather than for attempting to penetrate beneath to the motives which actuate economic conduct, is the reason set forth in Chapter II. Modern economic activity is immediately animated and guided, not by the quest of satisfactions, but by the quest of profits. Therefore business cycles are distinctly phenomena of a pecuniary as opposed to an industrial character. To dip beneath the business considerations relating to profit and loss, to deal with "psychic income" and "psychic cost," even to deal with physical pro- duction and consumption in other than their pecuniary bearings, is to distort the problem. For the processes actually involved in bringing about prosperity, crises, and depression are the processes performed by business men in endeav- oring to make money. Business men refuse to complicate their problems by going back of the dollar to that for which the dollar stands, and he who would understand what they are doing must treat their action as it is. But if the causes of business cycles which it is important to trace lie almost wholly within the pecuniary order, the consequences of moment are matters of human well-being. The ways in which business prosperity, crisis, and depression react upon the bodily and mental welfare of the community are so numerous, however, that it is feasible to mention only a few of the most significant. First, it has been shown that the provision made for satisfying the com- munity's needs — the physical volume of current production — grows more abundant when business is prosperous and more scanty in the earlier stages of business depression. But neither the expansion nor the shrinkage in this supply of useful goods is so great as the expansion and the shrinkage in the corresponding pecuniary values. And the alteration which does occur in the output of industry is distinctly greater with reference to producers' than with reference to staple consumers' goods. That is, the amount of food, clothing, and the like produced by the community for its own current use is steadier than the business barometers suggest. Upon the distribution of this current supply of useful goods business cycles exert a strong influence, since they produce widespread changes both in money incomes and in the purchasing power of dollars. The precarious plight of the wage-earner's family in the money economy consists largely in the shrinkage of employment caused by business depression. The physical privations, the anxieties, and the humiliations forced upon this class by inability to find work are not only themselves a grievous evil, but they are also prolific sources of 598 MEMOIRS OF THE UNIVERSITY OF CALIFORNIA further evils — intemperance, prostitution, chronic idleness, the desertion of families, and the stunting of children. Profits doubtless shrink in larger pro- portion than wages, and many families who draw their income from this source are forced to adopt painful economies and to endure much anxiety, though they seldom suffer such extreme hardships as those of wage-earners out of work. On the other hand, the relatively small class of persons whose incomes really do remain fixed during depression profit by the reduced cost of living; but for this material advantage they pay a heavy price in uncertainty and in sympathetic participation in the sufferings of others. Business cycles also affect material well-being by influencing the selection of business leaders, the centralization of economic power, and the progress of industrial technique. Prosperity stimulates enterprise and encourages business men to set up for themselves. But by making it easier for the unfit managers to survive for a time, it reduces somewhat the community's economic efficiency. Even the abler business men, under the press of hurry, relax somewhat their precau- tions against waste. Meanwhile investors become more inclined toward rash ventures, and an increasing proportion of society's energy is thrown away in unprofitable undertakings. Crisis and depression, on the contrary, serve at least to weed out the less competent managers, to enforce vigilant attention to detail upon all, and to make investors cautious. The foreclosure sales and reorganizations to which depression gives rise afford the best opportunity for the increase of fortunes already large, and for the rise of business magnates already powerful." In this way depression promotes the centralization of control in the world of business. But, on the contrary, it often weakens or destroys loosely cemented alliances or pools for the regulation of competition. And the promotion of great combinations among business enterprises formerly independent is usually undertaken in the middle stages of prosperity, when investors are optimistically inclined and before the money and bond markets have become stringent. For the progress of industrial technique, in the sense of the practical application of improvements already invented, the most favorable phase of the business cycle is the period of revival of activity. Depression forces men to cast about for any feasible method of reducing cost ; but it offers little induce- ment for the immediate expenditure of large sums upon improvements. It is the season when alterations are planned ; that of revival is the season when they are executed on the largest scale. Prosperity is less favorable, not for lack of funds, but for lack of time and attention. In general, prosperity is a season of strenuous activity, recompensed by materia] comfort and enlivened by high hopes. Its chief social drawbacks are the waste incidental to hurry, the extravagance bred by affluence and optimism, the obsession of attention by business interests, and the anxieties which cloud 11 See Anna Youngman, The Economic Causes of Great Fortunes (New York, 1909). MITCHELL: BUSINESS CYCLES 599 its later days. A crisis intensifies these anxieties, particularly for business men and investors. The turmoil subsides in depression; but the subsidence brings despondency upon those whose fears have been realized, and leaves others with a dull outlook at best. To workingmen it is the season of most suffering — of over-driving when at work and of privation when on the street. For these disadvantages its repression of waste, stimulation of plans for technical improvements, and enforcement of caution regarding investments are but partial compensation. Brief as it is, this statement of how business cycles react upon social well- being suffices to suggest the double personality acquired by citizens of the money economy. Money making for the individual, business prosperity for the nation, are artificial ends of endeavor imposed by pecuniary institutions. Beneath one lies the individual's impulsive activities — his maze of instinctive reactions partially systematized into conscious wants, definite knowledge, and purposefiil efforts. Beneath the other lie the vague and conflicting ideals of social welfare which members of each generation re-fashion after their own images. In this dim inner world lie the ultimate motives and meanings of action, and from it emerge the wavering standards by which men judge what is for them worth while. The money economy has not supplanted, but it has harnessed these forces. Upon human activity and human ideals it has stamped its own pattern. How it has facilitated the division of labor, how it has given a pecuniary twist to the desire for distinction, how it has shifted the basis of political power and given rise to new social classes — these results of the money economy are widely recognized. How it has taught men to think in terms of its own formal logic, efficient within certain limits but arid when pushed to extremes, has been par- tially worked out by writers like Simmel, Sombart, and Veblen. How its technical exigencies subject economic activity to continual alternations of expansion and contraction this book has aimed to show in detail. Subject as men are to the sway of pecuniary concepts and ideals they can still judge the workings of the money economy by more intimate and more vital standards. To make these latter standards clear, to show in what definite ways the quest of profits transgresses them, and to devise feasible methods of remedying these ill results, is a large part of the task of social reform. Economic theory will not prove of much use in this work unless it grasps the relations between the pecuniary institutions which civilized man is perfecting, the human nature which he inherits from savage ancestors, and the new forces which science lends him. To treat money as an empty symbol which "makes no difference save one of convenience" is a habit exceeded in superficiality only by the habit against which it protests— that of treating money-making as the ultimate goal of effort. INDEX "Abnormal" events and crises, 3, 5, 6, 582. Abortive revivals of business, 554, 555. Accounting, 31, 32. Advertising, cost of, and the system of prices, 28. Aftalion, A., theory of business cycles, 8, 9, 19, 500. Agriculture, development of business enterprise in, 22, 23; relative importance in different coun- tries, 40, 41; connection with business cycles, 239, 456, 582. Albert, H., 163n., 164n. Aldrich-Vreeland Act, 551n. Amalgamated Copper Company, 66. American Railway Union Strike of 1894, 59. American Tobacco Company, 85. Andrew, A. P., 141n., 164, 240n., 252n., 285n., 287n., 288n., 292n., 295, 311, 315, 316, 318, 319, 325n., 517n., 518, 521. Animal products, relative prices of, 104-109. Com- pare, Food, prices of, and Farm products, relative prices of. Annals of business, 1890-1911, United States, Eng- land, France, and Germany, 44-85; tabular sum- mary, 88. Anthracite-coal railways, 194. Applications for investment loans, 398—410, 486, 487, 559, 560, 566, 567. Argentina, European investments in the securities of, 47, 48. Ashley, W. J., 431n. Associated Banks of New York, 323-333; compare New York Clearing House. Atkinson, F. J., 281n. Australia, bank failures in 1893, 51. Austria, crisis of 1873, 44. Bacon, N. T., 69n. Baker, E. S., 69. Balance of trade, 68-70, 254-257; compare Imports. Baltimore fire, 68. Bank checks, use in different countries, 244; eea Deposit currency. Bank, circulation, see Bank notes. Deposit currencj'. Bank clearings, 244-248, 273, 276, 307, 308, 309, 534-6, 546, 547. Bank deposits, see Deposit currency. Bank earnings, expenses, and profits, 427-431. Bank failures, 442, 443, 515, 516. Bank notes, 288-295; ch. vii, passim, 323-384; in panic of 1907, 517-521; in depression, 560. Bank of England, action in the crisis of 1890, 48; discount rates, 166-170; reports, 323, 377-386; discounts in 1906, 523; action in crisis of 1907, 540-543, 551; run on, 1708, 584. Bank of France, action in crisis of 1889, 47; action in the crisis of 1890, 48; discount rates, 166-170; circulation, 293; rapidity of turnover, 309, 310; reports, 323, 377-386; loan to Bank of England in 1907, 540, 543. Bank of Germany, see Reichsbank. Bank rates, see Discount rates. Bank reserves, ch. vii, passim, 323-386; 490-494, 519- 522, 527-530, 540, 541, 551-3; 560-562. Bankers' Magazine (London), 73n., 544. Bankers' Magazine (New York), 53. Banking reform, 550-553, 586. Banking, relation to business enterprises, 24. Banking systems — dissimilarity between American and European, 42. Bankruptcies, statistics, 438-446; in panic of 1907, 530-532, 548, 549; in depression, 564, 565. Banks— money held by, 295-300, 311-317, 490-494, 560, 561; deposits subject to cheek, 300-306, 318-322; condition of banks of various classes, 323-386; savings made by, 415, 416; profits of, 427-431; failures among, 442, 443. Baring Brothers and Company, failure of, 48, 189, 550. Barnett, 6. E., 311-317, 322. Barney, C. J., 51 6n. Barometers of business conditions, 232, 242, 456, 457, 591-6. Beer, consumption of, 264-267. Beginnings of business cycles, 583-5. Bergmann, E. von, 3n. Berlin, crisis of 1873, 44; discount rates, 166-170. Beveridge, W. H., theory of business cycles, 6, 19, 269n., 477n., 579, 580. Bills of exchange, 247-251, 273, 276; see Foreign ex- change. Domestic exchange. Birmingham, clearings in 1907, 547. Birth rates, 224, 225. Board of Trade (British), wholesale prices, 118-122; retail prices, 129; wages, 136-9. Board of Trade Labour Gazette, 118. Boer war, 60, 64, 70, 158, 278. Bonds — rates of interest yielded by, 140-170; prices of, 201-222; volume of sales, 393-7; listings, 408- 410; sales of in periods of prosperity, 486, 487n.; [ 600 ] INDEX yields and prices before crisis of 1907, 506, 507; prices during the panic, 524, 525; prices during depression, 559. Bonds of England, France, and Germany, 163-6, 219- 221. Bonds of "United States, issues of 1894-96, 57, 58; quotations, 140, 141; yields, 144, 146, 159, 160, 163-6; relative prices of, 204, 205, 219-222. "Booms," see Prosperity of business. Boston, banks, in panic of 1907, 527, 528, 530. Boston, ratio of bank clearings to deposits, 308, 309. Bouniatian, M., theory of business cycles, 9, 10, 19, 584n. Bowley, A. L., 587. Bradstreet's, index number, 96, 113-117, 533, 591. Bradstreet's, statistics of bankruptcies, 438-443, 531, 532, 549. Breadstuffs, imports and exports, 258-263. Bristol, loan in 1907, 538; clearings in 1907, 547. Brown, H. G., 18n. Bryan, W. J., 58, 59, 64, 157, 158, 189, 282. Buildings erected, 420, 421. Bulletin of the Bureau of Labor, 96, 114, 130. Bureau of Labor (U. S.), retail prices, 94, 95; whole- sale prices, 113-117, 533n. ; wages, 130-136; pur- chasing power of wage-earners, 500n. Business activity, revivals of, 452, 453; character- istics of, 453^74; compare Prosperity of busi- ness. Business annals, 1890-1911, 44-85; tabular summary, 88. Business barometers, 232, 242, 456, 457, 591-6. Business costs, increase in periods of prosperity, 475-483; encroachments upon profits, 494-503; decrease in periods of depression, 562-5. Business crises, see Crises. Business depression, see Depression of business. Business enterprises, 22-26; prices of, 29; contrasted with government management, 36, 37; efficiency of, 37-40; statistics of prices of shares, 170-219; savings made by, 414-418; bankruptcies of, 438- 446; capitalization of, 503-511, 564, 565. Business equilibrium, 472-4. Business liquidation, see Liquidation. Business panics, see Panics. Business prosperity, see Prosperity of business. Business revivals, see Eevival of business activity. Business, volume of, 223-277, 453-7, 534, 539, 548, 556-8, &65-8. Call-loan rates, 144-156, 160-163, 177-187, 526, 542. Canadian banks, 356n. Capacity for production, see Industrial equipment. Capital — bank, ch. vii, passim, 323-384; public ap- plications for, 398-410, 559, 560. Capitalist, see Enterpriser, Stockholders, Lenders, Investors. Capitalization of business enterprises, in relation to business cycles, 9, 14, 15; how affected by pros- perity, 503-511; how affected by depression, 564, 565. Carver, T. N., theory of business cycles, 16, 17, 19, 104, 580. Cash reserves of banks, ch. vii, passim., 323-384, 490-494, 519-522, 527-530, 540, 541, 551-3; 560- 562. Central Railroad of New Jersey, bonds, 142, 143, 157, 204. Central reserve-city banks, 356-366, 522, 528, 529, 535, 536. Chamberlain, J., 69, 71. Checking deposits, see Deposit currency. Checks, see Bank checks. Deposit currency. Chesapeake and Ohio bonds, 142, 143, 202, 204. Chicago and Eastern Illinois, bonds, 142, 143, 157, 204. Chicago banks, in panic of 1907, 527, 528, 530, 535, 536. Chicago, Burlington, and Quincy, bonds, 142, 143, 157, 204. Chicago, Milwaukee, and St. Paul, bonds, 142, 143, 157, 204, 218. Chicago, St. Paul, Minneapolis, and Omaha, bonds, 142, 143, 204. Chile, crisis, 1907, 539. Circulation, monetary, see Currency. Circulation, rapidity of, 306-310, 491, 561. Clearing-house loan certificates, issues in 1890, 49; in 1893, 56; in 1907, 78, 517, 552. Clearings, see Bank clearings. Cleveland, 6., 46, 56, 57, 58, 59, 60, 179, 414. Closson, C. C, 56n. Goal mines, relation to other enterprises, 23; number of days operated, 268. Coal, statistics of production, 230-232, 272, 275, 484n. Coal-carrying railways, stocks, 194. Cocoa, consumption of, 267. Coffee, consumption of, 264-267. Coinage, 279-287. Commerce, foreign, volume of, 252-263, 274, 277, 286, 287, 523, 524, 543, 545. Commercial and Financial Chronicle, 46. Commercial crises, see Crises. Commercial failures, statistics of, 438-446; in panic of 1907, 530-532, 548, 549; in depression, 564, 565. Commercial paper, discount rates, 140, 144—156, 160- 163, 166-170, 466-8, 482, 485-492, 499, 506, 507, 508, 526, 527, 542, 550, 551, 559. Commodity prices statistics, 1890-1911, 93-130; in periods of business revival, 457-464; in periods of high prosperity, 494-503; in months preceding a crisis, 507; during a panic, 532, 533; during depression, 558, 559, 568. Common stocks, tables of prices of, in 40 transpor- tation companies, 172-188: course of the market. [601] INDEX 189-191; diversity of fluctuations, 191-4; com- mon and preferred stocks in ten railways, 194- 201; comparison of the prices of common stocks, preferred stocks, dividend-paying stocks, bonds, and commodities, 201-219; prices in periods of revival, 469, 470; fluctuations preceding a crisis, 506-511; prices during a crisis, 524, 525, 540, 544; prices during depression, 559. Commons, J. E., 172. Compensated dollar, 586-8. Competition and prices, 31, 462n., 463n., 464n. Competition theory of business cycles, 6, 579, 580. Comptoir d' Escompte, failure of, 47, 221, 550. Comptroller of the Currency, 295, 311, 318, 319, 321, 356, 415, 427, 442. Conant, L., Jr., 63n, 64n, 413, 414. Condition of business, 1890-1911, summary, 88; see Prosperity, Crises, Depression, Revival of busi- ness activity. Confidence, increase of in business revivals, 455; decline of before crises, 508-514; in periods of depression, 554, 555, 568. Conjunctures, unforeseen, and business cycles, 3, 5, 6, 25, 582. Consolidation of business enterprises, see Industrial consolidations. Consols, British, 163-166, 219-221. Construction, costs of, in relation to business cycles, 11, 12, 471, 472, 483-9, 497-9, 567. Construction of industrial equipment, in periods of revival, 471, 472; in periods of prosperity, 483- 9; in periods of depression, 557, 567. Consumers' demand, and growth of population, 227, 228; increase in business revivals, 454; decrease in periods of depression, 556, 565, 566. Consumers' goods, prices of, 16, 17, 27; statistics for United States, retail, 94, 95; wholesale, 96-9, 102- 104, 461, 463, 464, 501, 502, 532, 533, 558; pro- duction of, 597. Consumption, volume of, 264-267, 279-282, 499- 503, 556, 565, 566, 597-9. Contract prices, 496, 497. Contraction of business, see Depression. Control over business cycles, 585-8. Conversion of loans, statistics, 399-403, 406. Copper, prices of, in 1907, 515. "Copper ring" of 1889, 47, 221. Corn, production of, 239-241; consumption of, 264, 265. "Corners," see Northern Pacific "corner"; Credits, manipulation of. Panics. Cortelyou, G. B., 517, 521. Cost of buildings, 420, 421. Costs of construction in relation to business cycles, 11, 12, 471, 472, 483-9, 497-9, 567. Costs of doing business, increase in periods of pros- perity, 475-483; encroachments upon profits, 494- 503, 538, 539, 544; decrease in periods of de- pression, 562-8. Cotton, production of, 239-241. Country banks, 356-366, 522. "Coxey's Army," 58. Credit, relations with profits, 503- 505; how affected by prosperity, 505, 506; how undermined, 506- 511; manipulation of credit and crises, 588-591. Chrises, theory of, chs. I, xii, xiv, i, 3; history of crises, chs. Ill, xiv, 583-5; effects upon economic welfare, 596-9. Crisis, of 1825, 3; of 1873, 44, 45; of 1884 in America, 45; of 1882 in Prance, 45, 46; of 1889 in Prance, 47; of 1890 in Europe and America, 48, 49; of 1893 in America, 51-6; of 1900 in Europe, 60, 61; of 1903-04 in America, 67, 68; of 1907 in Europe and America, 75-8; events preceding crisis of 1907 in America, 506-511; of 1907 in America, 515-537, in England, 538-548. Crops, 1890-1911, ch. ill, passim; connection with business conditions, 239, 453, 582. Cultural discipline of the money economy, 599. Cumulative change as characteristic of business cycles, 449, 451, 583. Currency, 278-322; in periods of prosperity, 490- 494; in panic of 1907, 516-522; in periods of depression, 560—562. Customary prices, 465, 466, 496, 497. Daggett, S., 564n. Death rates, 224, 225. Decils, commodity prices, 109-112; labor prices, 135- 7; stock prices, 191-3. Demand — for coal and iron, 230; increase of demand in times of revival, 453-454; effect upon price level, 458-460; decline of demand in periods of depression, 556, 557, 565-8; for capital, see Appli- cations for investment loans. Money-market. Deposit currency, 300-306, 318-322, 494, 560, 561. Deposits, banks, eh. vil, passim, 323-386; in savings- banks, 390-393; see Deposit currency. Deposits subject to check, see Deposit currency. Depression of business, after crisis of 1873, 44; after crisis of 1884, America, 46, in England, 1884-86, 46, 47; after crisis of 1890, England, Germany, and Prance, 49, 50; in 1904, America, 68; after crisis of 1900, Europe, 70-2; after crisis of 1907, England, 78, 79, Germany, 80, 81, Prance, 81, 82, America, 82, 83; after revival of 1909 Prance, 82, America, 84; effect on iron production and prices, 232, 233; connection with crops, 239; business conditions resulting from, 452, 453; periods of de- pression, 554-569; summary of theory, 577-9; effect upon economic welfare, 597-9. Dermietzel, O., 437, 469. Dewey, D. E., 131. Dietzel, H., 69n. Diffusion of business activity in periods of revival, 453-7. [ 602] INDEX Diminishing utility and crises, 8, 499-502. Dingley tariff, 60, 256, 265. Director of the Mint, 281, 282. Discount rates. New York, 140, 144-156, 160-163; New York, London, Paris, and Berlin, 166-170; in periods of revival, 466-8; in periods of pros- perity, 482, 485-492, 499, 506, 507, 508; in crisis, 526, 527, 542, 550, 551; in periods' of depression, 559, 560. Discounts, bank, ch. vii, passim, 323-384. Distilled spirits, consumption of, 264-7. Distribution of income and properity, how affected by business cycles, 596-9. Distribution of money among banks, public, and treasury, 295-300, 490, 491, 561. ' ' Disturbing causes ' ' and crises, 3, 5, 6, 582. Diversities among business cycles, 581-3. Dividend-paying stocks, relative prices of, 203-5, 215, 218. Dividends, upon preferred and common stocks in ten railways, 199; paid by interstate railways upon preferred and common stocks, 200; aggregate dividends of interstate railways, 423-7; of national banks, 427-431; of German corporations, 431-8. Domergue, J., index number, 119, 120, 121, 122, 124, 127 Domestic exchange rates in panic of 1907, 522, 523. Dresdeuer Kreditanstalt, failure of, 62. Dreyfus affair, 62. Dull times, see Depression. Dun's index number, 93n., 96, 113-117. Dun's Beview, 113, 172, 549. Dun's statistics of bankruptcies, 438-441, 531, 549. Early crises, 583-5. Earnings — railways, 242^, 273, 276, 422-7; national banks, 427-431; industrial trusts, 431n.; German corporations, 431-8. East Indian railway loan of 1907, 538. Economic welfare and business cycles, 596-9; see Money economy. Economist index number, 118n. Economist (London), 49, 50, 52, 60, 71, 80, 270, 371, 406, 407, 408, 538, 539, 544. Efficiency of business management, 483, 563, 564. Efficiency of labor, 477-9, 562, 563. Egypt, crisis, 1907, 539. Ehrenberg, K., 583n. Elasticity of currency, 291-5, 306, 492-4, 520, 521, 560, 561. Emigration, 225-229, 566. Emissions of capital, 398^10. Emotional factor in business cycles, 19n., 35, 455, 509, 510, 554, 555, 568. Employment, irregularity of, 268-271, 477, 539, 548, 556, 597, 598; means of reducing, 586, 587. Encroachments of costs upon profits, 475-483, 494- 503. England, Mrs. M. T., 581n. England — relative importance of manufacturing, agri- culture, and foreign commerce, 40, 41; banking system, 42, 43; public ownership, 43; crisis of 1873, depression of 1875-79, 45; revival of 1880, 45; revival of 1886-87, 46; prosperity of 1887- 89, 47; crisis of 1890, 48; depression of 1891-94, 49, 50; revival and prosperity of 1895-99, 60; 61; crisis of 1900, 61; depression of 1901-04, 70-1; prosperity of 1905-07, 73; crisis of 1907, 75, 76, 538-547; depression of 1908-09, 78, 79; revival of 1909-11, 79, 80; summary of business conditions, 1890-1911, 88; early crises, 583-5; see Population, Volume of business, etc. England — statistics — prices of commodities, 118- 130; prices of labor, 136-9; prices of loans, 163- 170; prices of bonds, 218-220; birth rate, death rate, marriage rate, emigration, 224-229; volume of business, 230-277; banking, 371-381; savings- bank deposits, 391-3; applications for loans, 400, 406, 407; joint-stock companies established, 410- 412; bankruptcies, 444-6; concerning crisis of 1907, 538-547. English, D., 141n. English joint-stock banks, 356n., 371-6. Enterprise, statistics relating to, 389-421; see Busi- ness enterprises. Enterpriser — role in guiding economic activity,' 32- 4; see Business enterprises. Equilibrium of business, 472-4. Essars, P. des, 309, 310. Exchange, bills of, 247-251, 273, 276; see Foreign exchange, Domestic exchange. Exchequer, stoppage of, 583. Expansion of business, 452-474. Expenses, classification of, 479n., 480; see Costs. Exports, volume of, 252-263, 274, 277, 286, 287; during crisis of 1907, 523, 524, 543, 545. Express, steamship, and telegraph company stocks, 194. Failures of business enterprises, 438-446; in panic of 1907, 530-532, 548, 549; in depression, 564, 565. Famine, Indian, 1898, 254. Farm products, relative prices of, 104-109, 533, 559. Fashoda incident, 256. Fetter, F. A., 32n. Financial cliques, and crises, 588-591. Financial Meview, 49, 51, 65, 141, 144, 172, 175, 508, 526. Financial stringency, co-existing with general pros- perity. United States, 1899, 63; 1901-02, 65, 66; see Stringency. Fisher, E. A., 398n. Fisher, L, 17, 18; 19, 149n., 263, 300, 301, 306, 307, 308, 315-317, 318, 319, 321, 322, 557, 580, 587, 593. Fixed charges railways, 423-7. Fixed prices, 496, 497. [603] INDEX Food, prices of, United States, at retail, 1890-07, 95; 1890-1911, 95n.; at retail and wholesale, 96, 97; in United States, England and France, 129, 130; comparea with relative wages, 135, 500n., 501n. Foodstuifs, imports and exports, 258-263. Forecasting of business conditions, 456, 457, 588-596. Foreclosure sales of railways, 443, 444; compare 564, 565. Foreign commerce, volume of, 252-263, 274, 277, 286, 287, 52?, 524, 543, 545. Foreign exchange rates, in panic of 1907, 523, 524. Foresight and crises, 588-596. Forest products, relative prices of, 104-109. Foville, A. de., index number, 119n. France — statistics — prices of commodities, 118-130; prices of loans, 163-170; prices of bonds, 219- 221; birth, death, and marriage rates, 224-227; emigration, 227-229; volume of business, 230-277; banking, 377-386; savings-bank deposits, 391-3; applications for loans, 402; joint-stock companies established, 410-412; bankruptcies, 444-6. France — thrift, 40; banking system, 42, 43; public ownership, 43; crisis of 1873, 45; revival of busi- ness in 1876, 45; crisis of 1882, 46; revival of 1887, 47; crisis of 1889, 47, 48; crisis of 1890, 49; depression of 1891-94, 49, 50; revival of 1895, prosperity of 1896-99, and crisis of 1900, 62; depression of 1901-04, 72; prosperity of 1905- 07, 74; crisis of 1907, 76; depression of 1908, 81; revival of 1909, 82; relapse of 1910-11, 82; sum- mary of business conditions, 1890-1911, 88; see Population, Volume of business, Currency, etc. Free-coinage of silver. Senate resolution of 1892, 52; campaign of 1896, 58, 59; effect of campaign upon bond market, 157, 158, 164; effect of cam- paign on stock market, 189, 221, 282, 292. Genesis of business cycles, 583-5. Geological Survey, 268. George, Lloyd, 544. German bonds, 163-6, 219-221. Germany — enterprise, 41; banking system, 42, 43; public ownership, 43; crisis of 1873, 44; depres- sion of 1874-1886, 45; revival and prosperity of 1887-89, 47; crisis of 1890, 48; depression of 1891-94, 49, 50; revival of 1894, prosperity of 189.5-99, and crisis of 1900-01, 61, 62; depression of 1901-04, 71, 72; prosperity of 1905-07, 73, 74; crisis of 1907, 76; depression of 1908-09, 80, 81; revival of 1910-11, 81; summary of business con- ditions, 1890-1911, 88; see Population, Volume of business. Currency, etc. Germany — statistics — prices of commodities, 118- 128; prices of loans, 163-170; prices of bonds, 219-221; birth, death, and marriage rates, 224- 227; emigration, 227-229; volume of business, 230-277; banking, 377-386; savings-bank de- posits, 391-3; applications for loans, 403; joint- stock companies established, 410-413; corpora- tion profits, 431-8; bankruptcies, 444^6. Gibson, A. H., 163n. Gibson index number, 96, 113-117. Gluts, general, theories concerning the cause of, 6, 7; see Crises. Gold, currency, 279-287, 492-4, 560-562. Gold, imports and exports, 49, 51-4, 177-187, 286, 517, 519, 540 543, 550, 551; see Bank reserves. Currency. Gold, industrial consumption of, 279-282, 285. Gold production, 278, 279. Gold reserve, U. S., 52-4, 56-8; see Bank reserves. Gold currency. Gold standard, 52-4, 56-8, 59, 64, 68, 157, 164, 222, 291, 292, 340. Goldmark, Josephine, 478n. Goldsmith bankers, 583, 584. Government bonds, yields upon investments in U. S., 146, 159, 160, 161; yields upon English, French, and German bonds, 163-6; relative prices of U. S., 204, 205; relative prices of English, French, and German bonds, 219-222. Government purchases, as means of steadying em- ployment, 586, 587. Government — role in guiding economic activity, 36, 37, 43. Greenbacks, 288-291. Gross and Kleeberg, 515. Hamburg, crisis, 1907, 539. Hamilton Bank, 516. Hard times, see Depression of business. Harriman, E. H., 65, 75, 590n. Harrison, B., 46. Harvests, 1890-1911, ch. iii, passim; connection with business cycles, 239, 453, 582. Hawkar, F., 163n. Heinze, F. A., 515. Heinze, Otto, & Co., 515. Helflferich, K., 248n. Henry, L. P., 477n. Hill, J., 65, 590n. History of business cycles, 583-5; see Annals of business. Hoarding of money, in panic of 1907, 516, 517. Hobson, J. A., theory of business cycles, 7, 8, 19. Holland, crisis, 1907, 539. Hooker, B. H., 117n. Hovey, C, 516n. Hull, G. H., theory of business cycles, 11, 12, 19, 488n., 580, 593. Bl-balanced production, as cause of crises, 4, 10, 11; see Spiethoff, Hull, Industrial equipment. Immigration, 225-229, 566. "Impair" savings, see Johanusen. Imports, volume of, 252-263, 274, 277, 286, 287; during crisis of 1907, 523, 524, 543, 545. [604] INDEX Incomes, as aggregates of prices, 31 ; see Saving, Dis- tribution, Economic welfare, Under-consumption. Index numbers, representative character of, 112-117; statistics, commodities, 94-130; wages, 130-139; interest rates and bond yields, 140-170; stocks, 170-201; bonds, 201-222; prices of commodities produced by trusts and under competitive con- ditions, 462n., 463n., 464n.; see Volume of busi- ness, Currency, Banking, Investment, Profits, Bankruptcies. India Council, 540, 543. India, famine of 1898, 254; absorption of gold by, 279-282. Industrial consolidations in United States, 1888-92, 55; 1898-99, 63, 64; of 1900-01, 65; the after- math of 1903-04, 67, 68; statistics, 413, 414; profits of, 431n.; price policy of, 462n., 463n., 464n. Industrial consumption of gold, 279-282, 285. Industrial equipment, increase of in revival, 471, 472; in periods of prosperity, 483-9, 497-9; m periods of depression, 557, 559, 560, 566, 567; see Spiethoff, Hull. Industrial Eevolution and business cycles, 584, 585. Industrial stocks, fluctuations preceding crisis of 1907, 508, 509n., 510n. Industry and money-making, 21-6. Inflation theory of crises, 4; see Currency. Inorganic goods, relative prices of, 16, 104-109; pro- duction of, 230-241; see Sombart. Insolvencies, statistics of, 438-446; in panic of 1907, 530-532, 548, 549; in depression, 564, 565. Insurance, relation to the system of prices, 28. Integration of industry, 413, 414, 586; see Industrial consolidations. Intemperance, 597, 598. Intercorporate relationships, 24. Interest rates, relation to business cycles, 17; as part of the system of prices, 28; statistics, 1890- 1911, 140-170; in periods of revival, 466-8; in periods of prosperity, 482, 485-492, 499, 506, 507, 508; in crisis of 1907, 526, 527, 542, 550, 551; in periods of depression 559, 560. Interior movements of currency in panic of 1907, 519. Interstate Commerce Commission, 24, 84, 198, 416, 422. Inventions, effect of, upon business cycles, 25, 569n. Investment, volume of, 389-421; in periods of busi- ness revival, 471, 472; in periods of prosperity, 483-488, 497-9; in periods of depression, 559, 560. Investors, share in guiding economic activity, 34-6. Iron, statistics of production, 230-236, 272, 275, 484n. Issues, of capital, 398-410; of paper money, see Bank notes. Jameson raid, 60, 62. Japan, war with Russia, 71, 72, 74. Jevons, H. S., 19n., 32n. Johannsen, N., theory of industrial depressions, 18, 19, 389, 569n., 580, 581. Joint-stock banks of England, 356n., 371-376. Jones, E. D., 3n., 4n., 19n. Journal of the Royal Statistical Society, 118. Juglar, C, 46n. Kelly, E., 516n., 590n. Kemmerer, E. W., 161n., 291n., 518n., 520n., 523n., 529n., 557. Kinley, D., 300, 301n. Knickerbocker Trust Company, suspension of, 77, 443, 516, 517, 549, 550. Korosi, J. von, 431n. Kuczynski, E., 136n. Labor costs, in periods of revival, 464-6, 468; in periods of prosperity, 476-480; in periods of depression, 562, 563. Labor, prices of, 28, 29; statistics for United States and England, 130-139; in periods of revival, 464- 6; in periods of prosperity, 476-9; in periods of depression, 562, 563 ; purchasing power of wages, 500n., 501n. Lasker, B., 587n. Lauck, W. J., 54n., 514n. Laughlin, J. L., 306n. Launay, L. de, 281, 286n. Laveleye, E. de, 398. Lavergne, A. de, 477u. Layton, W. T., 501n. Leipziger Bank, failure of, 62, 550. Lenders, role in guiding economic activity, 34-6. Lescure, J., 3n., 13, 14, 19, 485n., 580. Liabilities of bankrupt enterprises, 439-442, 445. Lincoln Trust Compajiy, 516. Liquidation, conditions which cause, 510, 511; char- acter and consequences, 512-514; following a crisis, 554^562. Liquors, consumption of, 264^267. Liverpool, clearings in 1907, 547. Loans, bank, ch. vii, passim, 323-384; see Discount rates. Loans, prices of, 28; statistics, 140-170; volume of, 398—410; in periods of revival, 466-8; in periods of prosperity, 482, 485-492; in periods of depres- sion, 559, 560; see Discount rates. Call-loan rates. Credit, Bonds, Investment. London, discount rates, 166-170, .542; bank clear- ings, 244-247, 546. Losses of national banks, 427-431. Lumber, see Forest products. McKinley,- W., 64, 65, 190. McKinley tariff act, 46. "Machine process," the, 23. Machine-building companies established in Germany, 412, 413; see Industrial equipment. Costs of con- struction, Spiethoff, Hull. Malt liquors, consumption of, 264-267. Manchester, clearings in 1907, 547. [605] INDEX Manchurian railway loan of 1907, 538. Manufactured goods, relative prices of, 99-104; im- ports and exports of, 258-263. Manufacturing, relative importance of in different countries, 40, 41. March, L., 118-120, 121, 122, 129. Marriage rate, 224, 225. Marx, K., 5. Material prosperity and business cycles, 597-9; see Money economy. May, E. E., theory of business cycles, 7, 19, 499; see TJnder-eonsumption. Mead, F. S., 552n. Meade, E. S., 431n., 462n., 463n., 464n. Mercantile National Bank, 515. Merchandise imports and exports, 252-263, 274, 277, 286, 287, 523, 524, 543, 545. Middle-western railway stocks, 194. Middlesex County Council, loan of 1907, 538. Mileage of railways, annual increase in, 418-420; placed under receivers, and sold under foreclosure, 443, 444. Milliken Brothers, failure of, 77. Mineral products, relative prices of, 104^109, 533, 559; see Sombart. Mining stocks, fluctuations preceding crisis of 1907, 509n. Mississippi Bubble, 585. Missouri, Kansas, and Texas bonds, 142, 143, 157, 204. Mitchell, T. W., 215n. Monetary stock, of gold, 279-287, of other kinds of money, 288-295; distribution of, 295-300, 490, 491; relations with prosperity, 492-4; in panic of 1907, 516-522; in periods of depression, 560-562. Money economy, 21, 22; efficiency of, 37-40; perfect- ing, 585-8; effects upon" welfare, 596-9. Money, statistics, 278-317; in periods of prosperity, 490-494; in crises, 516-522; in periods of de- pression, 560-562. Money-making and economic welfare, 21-6, 597-9. Money-market, in periods of revival, 466, 467; in periods of prosperity, 489-494, 503-511; during crises, 522-9, 539-542, 550-553; in periods of de- pression, 559, 562, 568, 569; see Discount rates. Moniieur des interets materiels, 398-404. Monopolies, price policy of, 462n., 463n., 464n.; see Industrial consolidations. Moore, H. L., 131. Morgan, J. P., 65, 51 6n. Morgan-Belmont Syndicate, 57, 59, 179, 414. Morse, C. W., 515. Muhleman, M. L., 282. National Bank of Commerce, 516. National banks (U.S.), circulation, 288-295; con- dition, 333-356; in reserve cities and country dis- tricts, 356-370; savings by, 415, 416; profits of. 427-431; failures among, 412, 443; defects of organization, 550, 551, 586. National Cordage Company, failure of, 51, 54, 56. National Monetary Commission, 166, 301, 323. National Prosperity Association of 1908, 554n. National-bank notes, 288-295, 333-370, 517, 520, 521, 550, 551. Nearing, S., 268n. Net income, interstate railways, 423-7, national banks, 427^31; see Profits. Netherlands, crisis, 1907, 539. New Orleans banks, in panic of 1907, 527, 529, 530, 535, 536. New York, Chicago, and St. Louis, bonds, 142, 143, 204. New York City, bond issues in 1907, 77; bank clear- ings, 244-248; ratio of clearings to deposits, 308, 309; condition of the banks, 323-333, 357-370, 515-530, 534-7, 561n. New York Clearing House, in panic of 1907, 515- 528, 530, 534-7. New York State, unemployment, 271, 477. New York Stock Exchange, see Stock Exchange, New York. Newcastle-on-Tyne, clearings in 1907, 547. Newman, P. L., 163n. Neymarck, A., 41n., 388u. "Normal" state, 85, 86. North Atlantic railway stocks, 194. Northern Pacific "corner" of 1901, 65, 67, 158, 190, 590n. Northern Securities case, 68. Northwestern railway stocks, 194. Norton, J. P., 113n., 114n. Noyes, A. D., 45u., 46n., 54n., 65n., 459n. Optimism, growth of in periods of business revival, 455; see Confidence. Organic and inorganic goods, prices of in relation to business cycles, 16, 104-109, 230-241; see Som- bart. Orient, absorption of gold, 279-282. Origin of business cycles, 583-5. Over-capitalization as cause of crises, 9, 14; see Veb- len. Over-confidence, 35; see Confidence. Over-production, theory of crises, 4, 25, 499-502, 580; compare Industrial equipment, Spiethoff, Under-consumption. Over-saving, as cause of crises, 7, 9; as cause of de- pressions, 18; see Saving, Under-consumption. Overend-Guruey, failure of, 45. Overhead charges, see Supplementary costs. Pacific railway stocks, 194. Palgrave, E. H. I., 166, 293n., 378n. Panama Canal Company, failure of, 47, 48; bonds, 159. Panic, of 1873, 44, 45; of 1893 in America, 56, 189; of 1907 in America, 77, 78, 190, 328, 515-537; [606] course of prices immediately preceding, 506-511; reaction of American panic on English crisis of 1907, 540, 551; beginning and end of panics, 549, 550; prevention of panics, 550, 551, 585-8; sum- mary of theory of panics, 576-577. Paper money, 288-295, 493; see Bank notes. Paris, bank clearings, 244, 245; discount rates, 166- 170. Parr's Bank, 301n. Pecuniary factors in economic welfare, 21-6, 596- 9; see Money economy. Pecuniary volume of business, 223, 224, 232-241, 453-7, 534, 539, 548, 556-8. Fer capita indices of volume of business, 271-277. Periodicity of business crises, 581. Petrazycki, L. von, 19n. Philadelphia, banks in panic of 1907, 527, 528, 530, 535, 536. Philadelphia, ratio of bank clearings to deposits, 308, 309. Physical volume of business, 223, 224, 597; see Vol- ume of business. Pig iron, see Iron. Pittsburg Stock Exchange, 516. " Planlessness of production," 37-40. Pohle, L., 19n., 81n., 227n. Pope Manufacturing Company, receivership of, 77. Population, movement of, 224-229, 566. Portugal, crisis, 1907, 539. Predatory financiers, 588-591. Preferred stocks, prices of in ten railways, 194-201; compared with prices of common stocks, dividend- paying stocks, bonds, and commodities, 201-219; see Stocks. Premium on currency, in panic of 1907, 517, 526. Prevention of panics, 550, 551, 585-8. Price level, in periods of business prosperity, 456- 470; why the rise is cheeked, 494-503; in months preceding a crisis, 506, 507; during depression, 558, 559, 568; see Prices of bonds, commodities, labor, etc. Prices, obstacles to advance of at climax of pros- perity, 494-503. Prices, public regulation of, 496, 497. Prices — system of, 27-30; role of, 31, 32; of con- sumers' goods, 27; of producers' goods, 27, 28; of business enterprises, 29; of services to per- sons, 29; of organic and inorganic goods, 16; inter-relations between, 30, 31; see Prices of com- modities, bonds, labor, etc. Prices of bonds — statistics — American railway bonds, 201-218; American, English, French, and German government bonds, 218-220; method of computing relative prices, 201, 202; fluctuations preceding panic of 1907, 506, 507; during the panic, 524, 525; in periods of depression, 559. Prices of commodities — statistics: character of data, 93, 94; consumers' goods at retail, 94, 95; con- sumers' goods at wholesale, 96, 97, 102, 103, 104; producers' goods, 98, 99; manufactured goods and raw materials, 99-102; organic ana inorganic goods, 104-109; dispersion of price fluctuations, 109-112; representative character of index num- bers, 112-117; comparison of relative prices in the United States, England, France, and Ger- many, 118-130; prices of pig-iron and agricul- tural products, 232-241; see Price level. Prices of labor — statistics — American data, 130-132; in American manufacturing industries, 132-6; in England, 136-9; in periods of revival, 464-6, in periods of prosperity, 476-9; in periods of de- pression, 559, 563. Prices of loans — statistics — character of American data, 140; 141, 144; tables of bond yields and discount rates, 142-156; course of the bond mar- ket, 1890-1911, 156-160; rates of interest on short-time loans, 160-163; rates of interest in New York, London, Paris, and Berlin, 163-170; in periods of revival, 466-8; in periods of pros- perity, 482, 485-492; in periods of depression, 559, 563; see Interest rates. Prices of stocks — statistics — significance of the data, 170-172; tables of American stock prices, 1890- 1911, 172-188; course of the market, 189-191; diversity of fluctuations, 191-4; prices of pre- ferred stocks, 194-201; comparison of the prices of commodities, stocks, and Donds, 201-219 ; fluctuations preceding panic of 1907, 506-511; prices during crisis, 524, 525, 540, 544; in de- pression, 559. Prime costs, in periods ot revival, 468; in prosperity, 476-483; in depression, 562-4. Producers' goods, prices of, 16, 17, 27, 28; statistics for U. S., 1890-1910, 98, 99, 102-104; 461, 463, 464, 487, 488, 532, 533, 558, 559. Production, of coal, iron, and agricultural staples, . 230-241; of gold, 278, 279; see Over-production. Productive capacity, see Industrial equipment. Professional forecasters of business conditions, 592. Professions, invaded by business enterprise, 22. Profits, variations in, and business cycles, 4, 13, 14, 15, 26; statistics of, 422-438; in periods of busi- ness revival, 468, 469; encroachments upon in periods of prosperity, 494-503; relation with credits, 503-505; effect of decline in prospective profits, 506-511; in England in summer of 1907, 538, 539, 544; in depression, 555, 568; see Money economy. Promoters, 29, 34; see Industrial consolidations. Prophecies of business conditions, 456, 457, 588-596. Prospective profits and business cycles, 13, 14, 15, 450, 451, 468, 469, 472, 473, 474, 494-502, 506- 511, 555, 568; see Money economy. Prosperity of business, Europe, 1896-99, 60, 61, 62; United States, 1898-1902, 63-66; Europe, 1905- 07, 72-4; United States, 1905-07, 74, 75; 1910-11 [607] INDEX in England and Germany, 79-81; effect upon pig- iron production and prices, 232, 233; connection with crops, 239; revivals of, 452, 453; cumulation of, 453-474; how prosperity breeds a crisis, 475- 511; summary of theory of prosperity, 573-6; effects upon economic welfare, 597-9. Prostitution, 597, 598. "Psychic" income, 597. Psychological factor in business cycles, 19n, 35, 455, 509, 510, 554, 555, 568. Public regulation of prices, 496, 497. Public utility stocks, fluctuations preceding panic of 1907, 510n. Public welfare, industrial and pecuniary factors in, 21-6; relationship of government and business enterprise toward, 36; how affected by business cycles, 596-9. Quantity-theory of money, 492-4, 560-562. Eaffalovich, A., 48n. Sailway Age, statistics of railway receiverships, 443. Eailway bonds, rates of interest yielded by, 140-166; relative prices of, 201-222, 506, 507, 524, 525, 559. Eailway building, 418-420. Eailway earnings, 242-244, 273, 276, 422-7. Eailway rates, 244, 496, 497. Eailway receiverships, 443, 444. Eailway savings, 416-418. Eailway stocks, prices of, significance of the data, 170-172; tables of stock prices, 1890-1911, 172- 188; course of the market, 189-191; diversity of fluctuations, 191-4; preferred stocks, 194-201; dividend-paying stocks, 204, 206, 214, 217; com- parison with the prices of commodities, and bonds, 201-219; fluctuations of stock prices pre- ceding panic of 1907, 510n., 511n.; during the crisis, 524, 525, 540, 544; during depression, 559. Eailways, relation to other business enterprises, 23; intercorporate relationships of, 24. Eapidity of circulation, 306-310, 494, 561. Bates of interest, see Interest rates. Eatios, bank loans to deposits, bank reserves to de- posits, bank capital to total liabilities, ch. vii, passim, 323-384. Eaw materials, organic and inorganic, 16; prices of, 28; statistics for United States, 1890-1910, 99- 102, 104-109; imports and exports, 258-263; prices in periods of revival, 461, 462; in periods of pros- perity, 481, 482; in months preceding a crisis, 506, 507; in a crisis, 532, 533; in depression, 558, 559; see Sombart. Eeading Eailway, failure of, 51, 54. Eeceiverships of railways, 443, 444. Seforme Sconomique, 119, 120, 122, 130. Eefunding of loans, statistics, 399-403, 406, 560, 564. Eegnlation of prices by government, 496, 497. Eeichsbank, Germany, 166-170; 248n., 323, 377-386. Sentes, French, 163-166, 219-222. Rents, relation to the system of prices, 28; see Sup- plementary costs. Ee-organization of business enterprises, 564, 565. Eeserve-city banks, 356-366, 522. Eeserves, bank, ch. vii, passim, 323-386; 490-494, 519-522, 527-530, 540, 541, 551-3, 560-562. Eestriction of payments, in crisis of 1907, 517, 550, 551. Eetail prices, statistics of. United States, 94, 95; United States, England, and Prance, 129, 130; retail prices and wages, 132, 136, 500n., 501n., in periods of revival, 461, 462; in periods of pros- perity and crisis, 533; in periods of depression, 559. Eevival of business activity, America, 1879, 45; England, 1880, 45; France, 1876, 45; America, 1885-86, 46; England, 1886-87, 46; France, 1887, 47; England, France, and Germany, 1894^96, 60- 62; America, 1897, 60, 62; England, France, and Germany, 1904, 72^; America, 1904, 74, 75; Eng- land, France, and Germany, 1909, 79-82; America, 1909, 83; causes of, 452, 453; characteristics of, 453-474; blighting of, 554, 555; summary of theory of, 571-3. "Rich Man's Panic," 67, 68, 158, 190, 328, 416. Eipley, W. Z., 393n. Eisks imputed to bonds, 156, 157, 163, 202. Eobert, G., 163n. Eodbertus, K., 5. Eoscher, W., 4n. Eowntree, B. S., 587n. Russo-Japanese war, 71, 72, 74. St. Louis banks, in panic of 1907, 527, 529, 530, 535, 536. San Francisco, banks, in panic of 1907, 527, 529, 530, 535, 536; fire, 75, 473; real-estate sales, 398n. Sauerbeck, A., 79n., 118-122, 124, 127, 129, 533, 539. Savings, over-saving, and crises, 7, 8; "impair sav- ings," 18; volume of, 387-9, 414-418, 559, 560. Savings-bank deposits, statistics of, 390-393. Schaffle, A., 4. Schmitz, 0., index number, 119. Sehmoller, G., 387, 388. Schuekers, J. W., 51n. Seasonal variations in interest rates, 161. Securities, prices of, see Bonds, and Stocks. Security holdings of banks, ch. vii, passim, 323-384. Seligmau, E. E. A., 15n. Shares in business enterprises, see Stocks, Business enterprise. Shaw, Leslie M., 66, 159, 340. Sherman Anti-trust act, 85. Sherman silver-purchase act of 1890, 46, 52, 56, 289. Silver, monetary stock of, 288-291; see Free silver. Simmel, G., 599. Snyder, C, 586n. Socialist theory of crises, 5. SociSte des metaux, 47. [608] INDEX Soetbeer, A., index number, 119. Sombart, W., 5n., 16, 19, 22n., 45n., 104-109, 230, 482, 485n., 580, 599. South Africa, 256, 278, 279, 539. South America, 256. South Sea Scheme, 585. Southern railway stocks, 194. Spanish-American war, 62, 63, 158, 256. Speculation, relation to business cycles, 4, 19n., 35; European speculation in "Argentines," 1889- 90, 47, 48; French speculation in copper, 1888-89, 47; "Kaffir" speculation of 1894, 50; American speculation in land and "industrials," 1888-92, 55; American stock-market mania of 1901, 65; cotton speculation of 1903, 68; effect on bank clearings, 244-247; volume of, 389-421; diminu- tion of, 585, 586. Spiethoff, A., 10, 11, 13, 19, 387n., 413, 485n., 580. Spirits, consumption of, 264-267. Sprague, O. M. W., 55n., 295n., 329n., 362n., 514n., 516n., 517n., 518n., 520n., 522n., 523n., 524n., 530n., 552n. Stabilized dollar, 586-8. Standard Oil Company, 65, 85. State of trade, 1890-1911, summary, 88. State-bank failures, 442, 443. "Static state," 85, 86. Steel trade, relation to business enterprises, 23. Stevens, A. C, 56n., 514n. Stock Exchange, New York, transactions, 177-187, 244-8, 393-7, 408-410. Stock, monetary, 279-295. Stockholders, economic position of, 33, 171, 172. Stocks, statistics of prices, significance of the data, 170-172; tables of American stock prices, 1890- 1911, 172-188; course of the market, 189-191; diversity of fluctuations, 191-4; prices of pre- ferred stocks, 194-201; comparison of prices of commodities, stocks, and bonds, 201-219; prices in periods of revivals, 469, 470; sales of in periods of prosperity, 486, 487n.; fluctuations preceding panic of 1907, 506-511; prices and sales during panic, 524, 525, 540, 544; during depression, 559. Stone, N. I., 172. Stoppage of the Exchequer, 583. Strauss, A., 524n. Stringency, in investment market, 485, 486; in money market, 489-492, 526, 527, 530-538, 543- 8, 550, 551. Subsidiary silver coins, monetary stock of, 288-291. Substitutes for cash, in panic of 1907, 518. Sugar, consumption of, 264-267. Sully, D. J., 68. Summary, business conditions, 1890-1911, 88; theory of business cycles, 570-579. "Sunshine movements," 554, 555. Supplementary costs, decrease of in revivals, 458, 461, 468; increase of in prosperity, 475, 476; re-adjustment in depression, 564, 565. Surplus or deficit of interstate railways, 423-7. Surplus revenue of 1887-90, 46. Suspension of payments, see Restriction of pay- ments, Bankruptcies. Taussig, P. W., 51n.; 54n., 291n. Tea, consumption of, 264-267. Tension, in investment market, 485-7; in money mar- ket, 489-494, 526, 527, 530-538, 543-8, 550, 551. Thomas, E. B., 515. Thomas, 0. P., 515. Thrift-development in different countries, 41; see Saving. Tobacco, consumption of, 266. Trade, volume of, 223-277, 453-7, 534, 539, 548, 556- 8, 565-8. Transportation companies, prices of stocks, tables of prices of 40 common stocks, 172-188; course of the market, 189-191; diversity of fluctuations, 191—4; preferred and common stocks in ten rail- ways, 194-201; comparison of the prices of stocks, bonds, and commodities, 201-219; see Stocks, prices of. Transportation, relation to the system of prices, 28. Treasury notes of 1890, 46, 52, 56, 288-291. Treasury, XJ. S., money held by, 295-298, see Gold reserve. Trust Company of America, 516, 520n. Trusts, see Industrial consolidations; United States Steel Corporation. Tugan-Baranowsky, M., 224n. Tulip mania, 585. Twelfth Ward Bank, 516. Under-consumption theory of crises, 4, 499, 502, 580. Unemployment, 268-271, 477, 539, 548, 556, 597, 598; proposal for reducing, 586, 587. United Copper Company, 515. United Kingdom, see England. United States — relative importance of agriculture and foreign commerce, 40, 41; banking system and monetary habits, 42, 43; public ownership, 43; crisis of 1873, 44; depression of 1874-79, 45; revival of 1879, 45; crisis of 1884, 45; depression of 1884, 46; revival of 1885-86, 46; crisis of 1890, 49, 54; depression of Jan.-July, 1891, 51; revival of 1891, 51; panic of 1893, 51-6; depression of 1894, 58; revival of 1895, 59; stringency of 1896, 59; revival of 1897, 60, 62; prosperity in 1898-99, 63; pause of activity in 1900, 64; Stock- market mania of 1900-01, 65; prosperity in 1901- 02, 65, 66; "rich man's panic" in 1903-04, 67, 68; "American Invasion of Europe," 68-70; prosperity of 1905-07, 74, 75; panic of 1907, 77, 78; depression of 1908, 82, 83; revival of 1909, 83; relapse of 1910-11, 84, 85; summary of busi- ness conditions, 1890-1911, 88; monthly record of [609] INDEX events afEeoting the stock market, 177-187; re- view of bond market, 1890-1911, 156-160; review of stock market, 1890-1911, 189-191; population, 224-229; volume of business, 230-277; currency, 278-322; banking, 323-370; savings-bank deposits, 390-393; stocks and bonds sold, 393-8; stocks and bonds listed, 408-410; railways built, 418- 420; cost of buildings, 420, 421; bankruptcies, 438-44; panic of 1907, 515-538; need of re-organ- izing banking system, 550, 553, 586. United States bonds, quotations, 140, 141; yields, 144, 146, 159, 160, 163-6; relative prices of, 204, 205, 219-222; as basis of bank circulation, 292; amounts held by national banks, 333-364. United States Notes, 288-291. United States Shipbuilding Company, 67. United States, statistics, prices of commodities, 93- 129; prices of labor, 129-139; prices of loans, 140-170; prices of stocks, 170-201; prices of stocks, bonds, and commodities, 201-222; popula- tion, 224-227; immigration, 227-229; volume of trade, 230-277; concerning panic of 1907, 518- 537; see Currency, Banking, Saving, Investment, Profits, Bankrupticies. United States Steel Corporation, 65, 66, 75, 83, 190, 488n., 592. Vanderlint, F. A., 69. Variability of interest rates, 160, 161. Veblen, T. B., 14, 15, 19, 23n., 26n., 504n., 569n., 580, 590n., 599. Velocity of circulation, 306-310, 494, 561. Venezuela, 58, 59, 60, 414. Vialles, P., 19n. Vienna, panic of 1873, 44; crisis of 1882, 46. Volume of business, physical vs. pecuniary, 223, 224; statistics of, 224-277; increase of in periods of revival, 453-7; during crises, 534, 539, 548; in periods of depression, 556-8, 565-8. Wabash railway bonds, 142, 143, 204, 219. Wages, purchasing-power of, 7; as part of system of prices, 28, 29; for statistics see Labor, prices of. Wagon, E., 431-7, 469. Wall Street Journal, 172, 591. Walsh, J. E., 473. Webb, Mr. and Mrs. S., 587. Weill, N. B., 163n. Welfare and money-making, 21-6, 596-9. Werner, E., 412. Wheat, production of, 237-241 ; consumption of, 264, 265, 273, 276. "Weltwirtschaft," 86. West Shore Bailroad bonds, 142, 143, 144, 146-156, 157, 159-162, 164-6, 204-213, 219-222. Westinghouse receivership, 77, 516. , ' 'r-j ("' V^ Ti^ Wiedenfeld, K., 41n. ^dU^- Wine, consumption of, 264-7. Wirth, M., 45n., 48n. Women, wages of, 132-5. Wood, G. H., 129, 500n., 501n. Woodloek, T. P., 467n., 526n. Wool, consumption of, 264, 265. World's production of gold, 278, 279. Yields, upon investments in bonds, 140-166. Youngman, Anna, 598n. [610]