Nature - Economic Fluctuations the Business Cycle

Even when the problem is simplified in this way, it remains exceedingly complex. To keep from getting lost in a maze of complications, it is necessary to follow constantly the chief clue to business transactions.

Every business establishment is supposed to aim primarily at making money. When the prospects of profits improve, business becomes more active. When these prospects grow darker, business becomes dull. Everything from rainfall to politics which affects business exerts its influence by affecting this crucial factor—the prospects of profits. The profits clue will not only prevent one from going astray, but will also enable one to thread the business maze slowly, if he chooses, taking time to examine all details, or to traverse the maze rapidly with an eye only for the conspicuous features. Needless to say, in this chapter we shall have to move rapidly.

Plan of Discussion

Since business cycles run an unceasing round, each cycle growing out of its predecessor and merging into its successor, our analysis can start with any phase of the cycle we choose. With whatever phase of the cycle we start, we shall have to plunge into the middle of things, taking the business situation as it then stands for granted. But once this start has been made, the course of the subsequent discussion is fixed by the succession of phases through which the cycle passes. By following these phases around the full cycle we shall come back to the starting point and end the discussion by accounting for the situation of business which we took for granted at the beginning.

With full liberty of choice, it is well to start with the phase of the cycle through which American business is passing at present—the phase of revival after a depression. The first task will be to see how such a revival gathers momentum and produces prosperity. Then in order will come a discussion of how prosperity produces conditions which lead to crises, how crises run out into depressions, and finally how depressions after a time produce conditions which lead to new revivals.

This whole analysis will be a brief account of the cycle in general business. But it is important to note that different industries are affected by business cycles in different ways. Some industries, for example, are

hit early and hit hard by a decline in business activity, while other industries are affected but slightly. This aspect of the subject has received scant attention from investigators so far, and it cannot be adequately treated until the various industries have collected far more systematic records of their changing fortunes than are now available outside a narrow field. But with the cooperation of trade associations and certain business men we have collected some data that show how important and how promising is further work along similar lines. This material concerning the effect of business cycles upon particular industries will be presented in the next chapter after the cycle in general business has been traced.

Revivals and the Cumulation of Prosperity

A period of depression produces after a time certain conditions which favor an increase of business activity. Among these conditions are a level of prices low in comparison with the prices of prosperous times, drastic reductions in the cost of doing business, narrow margins of profit, ample bank reserves, and a conservative policy in capitalizing business enterprises and in granting credits.

These conditions are accompanied sooner or later by an increase in the physical volume of purchases. When a depression begins, business enterprises of most sorts have in stock or on order liberal supplies of merchandise. During the earlier months of dullness they fill such orders as they can get mainly from these supplies already on hand, and in turn they buy or manufacture new supplies but sparingly. Similarly, families and business concerns at the end of a period of prosperity usually have a liberal stock of clothing, household furnishings, and equipment. For a while they buy little except the perishable goods which must be continuously consumed, like food and transportation. But after depression has lasted for months, the semi-durable goods wear out and must be replaced or repaired. As that time comes there is a gradual increase of buying, and as the seller's stocks are gradually reduced, there is also a slow increase of manufacturing.