The regularity with which depression has followed prosperity—bad times followed good times—has led economists to think of fluctuations in business in terms of cycles. Furthermore, the recurrence of these fluctuations has made many writers think of them as inherent characteristics of our present economic order. The pattern of events which marks the course of the business cycle is now so well known that it can be described with precision. Although names may differ, economists seem to agree that the business cycle passes through certain well-defined phases.
Professor Wesley C. Mitchell, whose work on business cycles is the best known and the most substantial of all the modern works in this field, identifies four phases: prosperity, recession, depression, and revival. Additional phases have been added. Certainly as information on business cycles becomes more extensive refinements will become desirable. As matters stand, however, the four phases seem to be sufficient. The words crisis, panic, and boom which have been so frequently associated with business cycles are reserved to indicate degrees of recession and revival.
Now what are the peculiar characteristics of business enterprise in each of these phases? It makes little difference at what point in the cycle we begin, the fluctuations constitute an endless chain of events; but the sequence is perhaps clearer if we start with revival. During the phase of revival, production increases. Unemployment begins to diminish as new jobs are opened. Prices start to rise and profits enter the range of possibility. New opportunities for investment appear. Stocks are traded at higher prices, and fewer bond issues are defaulted. Commercial bank loans increase. The prosperity phase is merely an extension of revival. Prices continue to rise. Consumers' demand reaches the heavy industries. Unemployment is reduced to a minimum. Security prices continue to increase, encouraging speculation. The demand for bank credJt rises to a point where interest rates also rise. Profits are high and wages increase, but signs are already apparent of a slowing down in the movement of goods; inventories appear complete and opportunities for new investment seem fewer. Recession sets in as rising costs of production cannot be met by any further increases in the demand for goods. Inventories are so complete that wholesalers resort to a lower price policy in order to move their supplies. New building ceases. It becomes more difficult for debtors to meet their obligations. Speculators and investors in the security markets strive to sell, causing rapid decline in the prices of stocks. Banks recall their loans, and their reserves mount steadily. Unemployment begins to appear. Depression is the bottom point of the downward turn of business activity. It may affect only banks and commercial enterprises, or it may shake the economic world completely and bring business activity to a standstill. The marks of this phase are rapidly falling prices in consumers' commodities, goods moving slowly, stock market collapse, an increase in bankruptcies, some bank failures, and almost a complete absence of operation in heavy industry and in the building trades. Unemployment figures mount. Bank loans and new investment opportunities are negligible. However, economies in methods of production are introduced, a new product or two comes into large-scale production, stocks begin to move at the low prices, interest rates are set at a low figure, and bank credit is made easier. These characteristics indicate that the road is being cleared for an acceleration in business activity.
Business cycles as we have described them have been known for the past century and a half. Before that, the facts are not clear enough to speak with any certainty. But beginning with the earliest reliable information we can trace the cycles in business activity with a fair degree of assurance. A chart produced by Leonard P. Ayers of the Cleveland Trust Company presents graphically the rhythmic rise and fall of business activity since 1790. The chart indicates 23 major depressions, the one occurring during the 1930s being by far the worst. The significant facts indicated by the chart are the almost complete absence of what one would term normal years, and the almost equal division between depression years and prosperity years. The close association of war periods first with prosperity and then with depression is clearly demonstrated by the chart. Prosperous periods are associated, aside from the early days of war, with the opening of new industrial opportunities such as maritime commerce, land and railroads, corporate enterprise, and gold mining.