Knowledge that Transforms

T HE object of this study was to obtain for the United States, for as long a period as possible prior to the outbreak of the World War, a continuous monthly index of business activity as indicated by the fluctuations of bank clearings. In the construction of this index two steps were involved: first, monthly aggregate clearings were secured for a representative group of cities; and second, these monthly aggregates were corrected for long-time trend and seasonal variation, in order that the fluctuations significant of cyclical changes in business activity might be clearly revealed. The results of this study are presented graphically in the two charts appearing as an insert placed opposite this page. Chart i shows monthly aggregate clearings for a group of 7 selected cities, I875-I9I4, together with lines of trend. Chart 2 compares the monthly adjusted relatives of the series of aggregate clearings, corrected for secular trend and seasonal variation, with adjusted relatives for pig-iron production, another series held to be indicative of business activity.'

IN earlier issues of this REVIEW, statistical indexes of business activity for the United States and Great Britain have been developed. It is the purpose of the present study to construct a similar index for the German Empire in the decade and a half preceding the outbreak of the Great War. A statistical picture of German business is of interest primarily because it provides additional examples of individual business cycles. Unfortunately the number of cycles in the United States, or elsewhere, concerning which adequate statistical information is available is so limited as seriously to restrict the conclusions which may be drawn from their study. Monthly or at least quarterly data representing volume of business, prices, and interest rates are essential to the construction of an index, and these are obtainable only for short periods. The years I903-I4, cOvered by the indexes for the United States and Great Britain, include in the first instance only three business cycles and two in the latter. From the viewpoint of probability, five cases evidently do not constitute an entirely satisfactory basis for generalization. The addition of statistics for the German Empire during the relatively stable pre-war years should be of value, therefore, simply through increasing the number of business cycles available for examination. A second reason for undertaking the study of German business is the prospect that some light may be thrown on the interrelation of business cycles in different countries. During the past several years possible variations in foreign demand for American merchandise have frequently been spoken of as of great, sometimes as of preponderate importance in shaping the future course of domestic business. It may not be amiss to examine how this factor has operated in the past, whether it has been possible to have prosperity in the United States with depression abroad, or the reverse. Any light on the correlation of the cyclical swings in business activity at home and abroad is consequently of direct current interest in the problem of interpreting and forecasting current domestic business conditions. In order to facilitate international comparisons the present study parallels as far as the nature of the data permits the work of the Committee on Economic Research in its studies of the United States 2 and Great Britain.3 In these studies, with which readers of this REVIEW are familiar, various measures of business activity were analyzed by a statistical method developed by Professor Warren M. Persons to isolate the swings of business prosperity and depression. Fluctuations in monthly or quarterly series of data representing business activity, he has observed, are composites of numerous different types of movement. He divides them into four categories: (i) seasonal variation, or movements within the year recurring more or less regularly as a result of the round of the seasons; (2) long-time trend, or the gradual tendency to increase or decrease over long periods of time say, roughly, over periods of ten years or more in length; (3) movements of the business cycle; and (4) miscellaneous movements not falling into any of the above three classes. The statistical technique devised by Professor Persons eliminates the first two of these four types of movement, leaving as a residuum the movements of the business cycle and the miscellaneous variations. In the studies by the Committee on Economic Research of the business indexes of the United States and Great Britain, it was found (after they had been subjected to the above described method of analysis) that series of monthly or quarterly data reflecting business activity fell into three different groups according to the order in time of their movements in the business cycle. Series related to speculative ac-

IN the preceding installment of this series of studies, certain important differences in the seasonal and cyclical fluctuations of banking phenomena in New York City and outside of New York City were shown. These differences were such as to suggest doubts respecting the adequacy and significance of any generalizations about the characteristics of the behavior of bank credit in which the distinction between the banks in a country's central money market and the country's other banks is not taken into account. It was observed, furthermore, that the series relating to banks outside of New York City were, in effect, weighted averages of series such as might have been compiled for different types of banks or for banks in different sections of the country. Certain questions at once suggest themselves. How representative is the average? How much real diversity does it cover up? How far is the general process of give and take between New York City and the rest of the country supplemented by other recurrent processes that play a part in the mobilizing and the distributing of credit? The series that are analyzed in the present installment have been selected with the purpose of throwing light upon such questions. They are not the only series which would have been useful for that purpose. But the amount of transcribing and computing which these studies have required is so large that some selection has been necessary. A few words in explanation of the grounds upon which the selection is made appear to be called for. It will be observed that the threefold classification of national banks according to their legal reserve requirements (banks in central reserve cities, banks in reserve cities, and other banks) has been passed over in order to make room for a regional dassification. Preliminary studies led me to believe that the regional differences, on the whole, were more significant. Nevertheless, in addition to the figures already given for New York City, I have found it possible to give figures for another central reserve city (Chicago), and for two important reserve cities (Boston and San Francisco). The regional classification which I have used is taken over from the reports of the Comptroller of the Currency.' Doubtless, by some other scheme of dassification, regions could be marked off that would have more industrial and financial homogeneity. But the possible advantage of reclassification did not seem to justify the additional computation that would have been required. In the case of the Eastern states, the figures for New York City, given separately, have been subtracted from the aggregate for the region. The figures for the other regions have not been altered by subtractions or additions. The regional series, therefore, may be viewed as constituting a regional dissection of the composite series for all outside banks which were discussed in the preceding installment. I have not thought it worth while to use a large number of different series in this regional study. I have selected deposits and loans and discounts because their fluctuations, undoubtedly, are more significant than those of any other banking series. For the geographic sections, although not for the selected cities, I have also inquired into the fluctuations of investments. Aside from the variations of loans and discounts and the movement of money into and out of the banks the fluctuations of investments have a more important relation to the fluctuations of deposits than the movements of any other banking series have. As for the movement of money