Knowledge that Transforms

GENERAL business in the United States, as reflected by the B curve of the index chart (page 63), was at about the same average level in the first quarter of this year as in the preceding quarter a condition which had not prevailed since the second quarter of I930. The course of general business during the quarter was downward; and the March figure was undoubtedly at a new low level, somewhat below that of November I932. Exact measurement, either for March or the quarter as a whole, is impossible because of the temporary omission of bank debits figures due to the March bank moratorium. (See technical explanation below, page 73.) The declines in February and March were not exceptionally severe, particularly when allowance is made for the apparent sharpness of the revival late in March. The outstanding developments of the first quarter of I933 were in banking and credit. Various disquieting influences, largely political and psychological, led to renewed and intensified runs upon banks. Local moratoria became necessary, and presently a general suspension of gold payments and a temporary closing of all banks could not be avoided. March was largely devoted to the adoption of emergency measures which permitted the reopening of most banks; and certain other steps taken tended to restore confidence. The quarter closed with faith and hope rapidly reviving; and the imminence of inflation, which was to develop early in April, had not yet become a decisive factor in the reckoning of most business and financial leaders. Speculation, as reflected by Curve A (page 63), declined during the quarter; but the net movement for March as a whole was nearly horizontal. The most striking manifestations of the banking and monetary crisis were thus not in speculation but in the field of money and credit money rates and the currency and banking data.

DURING the current depression, many studies have been made concerning the action of general business during periods of depression and the subsequent recoveries. Practically all of these studies have had two common characteristics. Most of them have shown the differences between various depressions, and practically all of them have made very complete use of the extremely valuable tool hindsight. When studying a business depression and the subsequent recovery and the corresponding movement of stock prices, it is not difficult to look back on the upturn and feel sure that the low point has been passed, but it is extremely difficult to determine at the time whether an upturn is a false start which will be followed by further declines or whether it represents the beginning of real recovery. It is the purpose of this study to examine certain factors, the action and relationship of which have shown amazing similarity at the bottom of depressions, and to derive from this similarity certain indications and evidence which would have been useful during past depressions in differentiating between false starts and the actual beginning of cyclical recovery. Obviously, it is dangerous to expect the future to follow exactly the pattern of the past. Nevertheless, forecasting is necessary in investment and business operations, and the evidence of the past presented in this study may be helpful in formulating such a forecast when the assistance of hindsight is not available. Further, this study shows the relationship between business activity and the movement of security prices and indicates, as might be expected, that the stock market anticipates the course of business activity. The study covers the period from I878 to the present, during which time there were nine recoveries from major depressions. The characteristics of each recovery have been analyzed in detail and the results presented. The evidence that a cyclical upturn in business activity had begun was provided in each of these depressions by a certain definite relationship among three significant measures of business. THREE MEASURES OF BUSINESS ACTIVITY The variables used in this study are commodity prices, business activity, and bank clearings. The movement of commodity prices has been measured by Mr. Carl Snyder's Wholesale Commodity Price Index from I875 to I9I3, and from the latter year to the present time by the Bureau of Labor Statistics Wholesale Commodity Price Index. Business activity has been measured by the American Telephone and Telegraph Company's Index from I878 to I924 and by the Annalist Index of Business Activity from the year I929 to the present. Clearings have been measured by the Clearings Index of Business compiled by Mr. Carl Snyder. The American Telephone and Telegraph index is primarily a measure of productive activity. Prior to April I922, it included bank clearings and debits to individual accounts, but since that time these series have been dropped.' The clearings index gives another picture of business activity and the volume of trade. In the United States, according to Snyder's estimate, 8o per cent or more of all kinds of payments in the exchange of goods, property, and services are made by means of bank checks. This process of payment is peculiarly sensitive to changes in every phase of business and reflects the whole trade of the country and weights it automatically according to the pecuniary importance of the factors involved.2 Since I9I9, the index has been based upon debits to individual accounts, an accurate index of payments by bank checks. Prior to that time, the compilation of checks going through the country's clearing houses was used. Bank debits are larger than

T HE various trade and production indexes which have been compiled during recent years are valuable in furnishing students of economic history with a continuous record of the fluctuations of general business. To mention a few such indexes, Colonel Leonard Ayres has compiled an index of general business extending backto I790; the Index of Industrial Production and Trade prepared by Dr. Warren Persons covers the years since I875; and the American Telephone and Telegraph Company has a compositeindex of business activity from I877 to date. In the case of these averages, as well as of some others that might equally well have been mentioned, the purpose has been to secure a continuous record of the general economic situation in the United States. By the use of one or more of these compilations the relative magnitudes of cyclical movements may be compared. It is to be assumed that the element of long-time growth has been carefully measured 'and eliminated, and therefore, in order to measure the relative severities of depressions, or the relative intensities of booms, it should theoretically be necessary only to compare (in some manner or other) the displacements from the normal line. Such an approach, however, lacks objectivity, for the choice of a line of trend may be based in part upon the reasonableness of the degree of 'prosperity and depression that it indicates. The determination of the secular trend of an economic series is never wholly a precise mathematical operation; moreover, the fixing of the normal level for a given year is probably somewhat more dependent upon personal judgment than is the determination of the normal rate of increase. It seems desirable, accordingly, to utilize a more direct approach to the problem of measuring the amplitude of cyclical movements in this country. An examination of the size of the fluctuations occurring in the most important series of business data should throw some light upon the character of cyclical down-turns, and should prove useful in supplementing the story presented by the several composite indexes. Such an examination, if based upon monthly items, would be greatly handicapped by the scarcity of series extendingback more than fifty years. For annual series, on the other hand, the amount of available material is large. It is not necessary here to recount the advantages and disadvantages involved in the use of annual data. It is perfectly clear that for certain kinds of analysis yearly figures are far inferior to monthly. In particular, they are not satisfactory for the determination of time relationships among series in cases when the lags are in terms of months rather than of years. The conclusion, however, that annual data cannot serve a useful purpose in recording the magnitudes of cyclical movements does not seem warranted. On the contrary, it appears likely that any business decline important enough to be recognized by economic historians would be definitely noticeable in the annual record of almost every series relating to important business activities. This should be equally true whether the valley of the depression was shallow and wide, or deep and narrow. During periods of rapid growth, of course, it might happen that a mild down-turn would be reflected merely in the failure of the series to achieve more than a part of 'its full normal year-to-year increase. For the' measurement of such minor declines, annual data may often prove less dependable than monthly items. On the other hand, the use of yearly figures brings certain definite advantages in the measurement of cydes over a-long period of years. It makes available a much larger number of series upon which the investigator may base compan'sons. ' In addition, it automatically eliminates the problem of determining seasonal movements, and thus increases the objectivity of the results. Our choice of the period to be examined was based in large part upon economic considerations. From the point of view of American economic history, the years since I870 possess a sufficient amount of economic homogeneity to render appropriate the comparison of business conditions and tendencies. Numerous comparisons of the present situation with that in the seventies and in the nineties, revealing considerable similarities, have been made. Comparisons with the panics of I837 and of I857 are much less frequent, and are made with the realization that the United

Journal Article Taxation and Returns Get access Lindley M. Fraser Lindley M. Fraser The Queen's College, Oxford Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 1, Issue 1, October 1933, Pages 45–59, https://doi.org/10.2307/2967437 Published: 01 October 1933

Journal Article I.—A Note on Relative Shares Get access P. M. Sweezy P. M. Sweezy Cambridge, Mass. Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 1, Issue 1, October 1933, Pages 67–68, https://doi.org/10.2307/2967439 Published: 01 October 1933

IV.—A Note on Mr. Kahn's Paper Get access J. R. Hicks J. R. Hicks London School of Economics Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 1, Issue 1, October 1933, Pages 78–80, https://doi.org/10.2307/2967442 Published: 01 October 1933

WE owe to Dr. Hicks the extremely interesting proposition that an increase in the supply of any factor will increase its relative share (i.e. its proportion of the National Dividend) if its ' elasticity of substitution ' is greater than unity,' and will diminish its relative share if the elasticity of substitution is less than unity. For much the most satisfactory way of proving the validity of this rule, Dr. Hicks refers the reader to his mathematical Appendix. Here is to be found2 a symbolic definition of elasticity of substitution which gives the appearance of having been dictated by the requirements of algebra rather than of economics, and Dr. Hicks fails to tell us what it really means, while in the text we have to be content with the admission that the case where the elasticity of substitution is unity can only be defined in words by saying that in this case (initially, before any consequential changes in the supply of other factors takes place) the increase in one factor will raise the marginal product of all other factors taken together in the same proportion as the total product is raised.' The purpose of this note is to point out that Dr. Hicks' elasticity of substitution has a very simple meaning and to show how his proposition can be deduced by a very simple line of thought.' For, by a curious coincidence, Dr. Hicks' elasticity of substitution is exactly the same as Mrs. Robinson's elasticity of substitution.' Though Dr. Hicks was apparently unaware that his new conception was capable of so simple an interpretation, it is in fact the proportionate change in the ratio of the amounts of the factors divided by the proportionate change in the ratio of their marginal physical productivities.' Let us now imagine a curve relating the ratio of the amounts of the factors (measured along the x axis) to the ratio of the marginal productivities (measured along the y axis).' Then it follows from the above definition that the elasticity of substitution is equal to the elasticity of this curve. By a well-known proposition the area xy subtended by a point on a curve increases as x increases if the curve has an elasticity greater than unity, and