THE Great Depression, beginning in 1929, which had only partially been overcome, at any rate in the United States, by the end of the thirties, has been characterized as something quite unique in the long history of business cycles. To be sure, in a sense every cycle is unique and has special characteristics of its own. When, however, it is said that the Great Depression was a unique phenomenon, something else is meant than the ordinary degree of variation in duration and depth which we find from cycle to cycle.
There is not, however, unanimity of opinion among business cycle students with respect to the uniqueness of the Great Depression. There are those who hold that the severity of this depression and the difficulty of overcoming it fit quite well into the general scheme of cycle development over the last one hundred and fifty years.
Whether the Great Depression was indeed unique or not, it is at any rate true that it will be much better understood if it is set off against the background of the history of business cycle movements. To do so, it is necessary to differentiate various cycles or wavelike movements in the process of modem economic development.
Whether these movements may strictly be characterized as cyclical
is at least debatable. Some would defend the use of the term “fluctuations” as more accurate, since the movements of output, employment, and prices vary so greatly from time
to time and are highly irregular. On the other side, those who run to abstract theorizing, and desire as far as possible to fit concrete data into a mold or pattern, will be inclined to search for greater regularity in the movements than can properly be described under the term “fluctuations.” And, indeed, the data lend a good deal of support to this point of view. It is, at any rate, a reasonably defensible proposition that the movements of industry and business run in cycles sufficiently regular so that, within limits, a period may be assigned to their duration. Moreover, the analysis of the cycle gives strong support to the view that a movement, once started in one direction, tends to cumulate and grow stronger and stronger up to a certain point beyond which the generating forces weaken until a reverse movement finally develops in the opposite direction. If this is true, the movement is wavelike in character, and not merely an erratic fluctuation.
Into this discussion—on which there is an extensive literature—we shall not enter. We shall follow the view that economic development does run in cycles. We believe that there is sufficient justification in the historical and statistical record, supported by the theoretical analysis of the cumulative process, to warrant this assumption.
The upward and downward movements, which together make business cycles, are now commonly believed to be mainly associated with fluctuations in the volume of real investment. We distinguish between real investment and financial investment. When one purchases a share in a corporate enterprise or a bond or a mortgage, one is making a financial investment. When one, however, builds a house or a factory or a machine, one is making a real investment. Real investment may, of course, be measured either in value terms or in quantitative terms.
The fluctuations of cyclical movements may be characterized in terms of either money income, real income (the output of material goods and services), or employment. These three categories, to be sure, are not identical. Money income is a function both of real income and of price movements, while
real income or output differs from employment by reason of changes in productivity. Cyclically, however, the three move more or less in consonance, though the trend movement is likely to differ considerably under varying circumstances. For certain problems it is extremely important to differentiate sharply between them. But frequently in discussing economic fluctuations or cyclical movements all three may be regarded without serious error as moving together, whether in the upswing or in the downswing. This is particularly true for the short-run movements but less true for the longer-run developments.
We have noted that the upswing and downswing movements of income, output, and employment are mainly characterized by fluctuations in the rate of real investment. It is true, as we shall develop later, that the fluctuations in income, output, and employment involve more than fluctuations in real investment alone. Consumption also rises and falls with the cycle movement, but less violently proportionally than the rise and fall of real investment. Moreover, consumption rises or falls, in large part, in response to movements in real investment, though to some extent, as we shall see later, these movements are of an independent character unrelated to the movements of real investment.
We distinguish real investment from consumption in a more or less arbitrary manner, though following conventional terminology. By real investment we mean the purchase of capital goods, by which is usually meant: (1) producers’ goods, including (a) industrial, public utility, commercial and financial plant and equipment and (b) inventories of stocks of goods in process or held for future sale; and (2) consumers’ capital, including (a) residential building and (b) public works of all kinds, such as public buildings, roads, and the like.
In consumption we include purchases of: (a) personal services, (b) nondurable consumption goods, such as food and the like, (c) semidurable consumers’ goods, such as clothing, and (d) durable consumers’ goods, such as automobiles and household equipment.
The most general, all-inclusive statement of the essential character of cyclical movements is that they consist in an increase or decline, as the case may be, in the purchase of real investment goods and of durable consumers’ goods as defined above. While the role of durable consumers’ goods plays an increasingly important part, it is nevertheless still true, and formerly almost exclusively so, that the causes of business fluctuations are to be found mainly in the factors which bring about a rise and fall in the rate of real investment. This analysis will be developed with the necessary qualifications in subsequent chapters.
Major and Minor Cycles
Quite commonly, particularly in America, the term “business cycle” is applied with reference both to what is called the minor cycle and to the major cycle. And with respect to the term “depression,” equally the term is applied both to minor recessions and to major depressions. In Europe, when the business or trade cycle is spoken of, reference is usually made to what we call the major cycle.
On the whole it is, we think, preferable to concentrate attention upon the major cycle in business cycle analysis. But it is not possible in doing so to overlook the fact that, particularly in the upswing phase of the major cycle, there regularly occurs, especially in American experience, one or sometimes two interruptions to the upswing movement. In seven of the fifteen major cycles in the period from 1807 to 1937 there were two minor recessions, and in eight of the major upswings there was one minor recession. Since 1883, out of six major cycles two were interrupted by two minor recessions and four by one minor recession.1
The major upswing, as we have already noted, can be characterized
essentially as an expansion in the rate of real investment. For the purpose currently at hand, it is most useful to classify real investment into the two categories suggested above: (a) inventories of commodity stocks and (b) real investment in fixed capital, including plant and equipment, housing and public construction. When an upsurge in real investment occurs, it is not unusual for the spurt in inventory accumulation to run ahead of the normal requirements indicated by the rising trend. When this is the case, sooner or later a temporary saturation in inventory accumulation develops, leading to an inventory recession. Not infrequently the minor setbacks experienced in the major upswings may be characterized as inventory recessions. But sometimes other situations may initiate or aggravate these minor recessions. Thus, for example, in the beginning of the major upswing it may be that large investment in improved machinery occurs and that after a time a temporary saturation is reached in this type of investment leading to a recession. The general buoyancy of the upswing, however, soon starts the economy upward again with a further burst of real investment after the temporary setback thus sustained. Sometimes special situations are partly responsible for minor recessions, such as critical international developments, labor disturbances, or even special factors having to do with major industries, such as the Ford shutdown in 1927. Regularly, however, inventory movements play an important role.
It is to be noted that very rarely do minor upswings interrupt the downturn of the major cycle. One notable case, however, was the temporary recovery which occurred in 1895 in the major downswing from 1893 to 1897. Following this very brief recovery, the economy continued downward in a deep and prolonged depression. There are very few other clear cases in our history of a temporary upturn in the period of the major downswing of the business cycle. There are, however, the brief recoveries of 1818, 1828, and 1841, all of them coming in the period of the long, difficult readjustment after the Napoleonic Wars. About this period we shall have more
to say later in connection with a discussion of the so-called “long waves.” For the most part, the minor cycle in American experience has appeared in the form of a temporary recession in the general upswing of the major cycle.
It has been suggested (and to some extent this view is tenable) that both the Great Depression from 1929 to 1932 inclusive and the recovery from 1933 to 1939 follow a pattern which is fundamentally similar to other cycles. This is not to say, however, that those who advance this view would necessarily argue that there is implied in such correspondence anything in the nature of inevitableness about the course of the cycle development, whether in the downswing or in the upswing. Indeed, it is highly probable that wiser and sounder public policy could have modified very greatly the development both in the depression and in the recovery phases. What is true is that the experiences of this decade certainly become more understandable if we set them out against the background of the history of earlier American business cycles.
One generalization stands out very clearly from this record—one which apparently has been lost sight of in the current period, particularly with respect to the recovery movement from 1933 on. The generalization referred to is the highly important one that every prolonged upswing period has been interrupted by minor recessions. From the record of past American experience it is clear that a continuous upswing has rarely occurred extending without interruption beyond a period of about four years, and usually the period is somewhat shorter. From this we may deduce that the major upswing represents a discontinuous, jerky spurt in the rate of real investment; that the rapid expansion of real investment proceeds by fits and starts. Particularly, as we have noted, is it difficult in the upswing period, when demand and prices are rising, to hold to an appropriate pace the accumulation of inventories.
The American experience indicates that the major business cycle has had an average duration of a little over eight years. Thus, from 1795 to 1937 there were seventeen cycles of an
average duration of 8.35 years. In the hundred-year period 1827 to 1937 there were twelve major cycles of an average duration of 8.33 years. In the eighty-year period from 1857 to 1937 there were ten major cycles of an average duration of 8.0 years. And in the period from 1873 to 1937 there were eight major cycles of an average duration of 8.0 years.
Since one to two minor peaks regularly occur between the major peaks, it is clear that the minor cycle is something less than half the duration of the major cycle. In the one hundred and thirty-year period 1807 to 1937 there were thirty-seven minor cycles with an average duration of 3.51 years. In the eighty-year period from 1857 to 1937 there were twenty-three minor cycles with an average duration of 3.48 years. And from 1890 to 1937 there were fourteen minor cycles with an average duration of 3.36 years.
The major cycles vary in length from a minimum of six years to a maximum of twelve years, though with rare exceptions they fall within the range of seven to ten years, the average being slightly over eight years. The minor cycles have a range of from a minimum of two years to a maximum of six years, though they usually fall within the range of three to four years, with the average slightly over three and one-third years.
But there are other factors, altogether aside from those which bring about the temporary interruptions in the broad sweeps of the major cycle, which profoundly alter the course of its development and influence the intensity and violence both of the upswing and of the downswing. One of the most important is one that, strangely enough, has been greatly neglected in the analysis of business cycles. And this factor is of peculiar significance for us, for it has an important bearing upon an understanding of the Great Depression of the nineteen-thirties.
The factor to which we refer is the fluctuation in building construction. This follows, in large measure, a wavelike movement
much longer than the major business cycle. Notable studies have been made by Riggleman, Newman, Long, and the Federal Reserve Bank of New York City of building construction, both residential and nonresidential.2
Riggleman’s study extends over a century from 1830 to 1935 and covers, in the earlier period, three cities and, in the later period, sixty-five cities. Long’s study covers the period from 1864 to 1934 and includes twenty-nine cities. Newman’s study is for seventeen cities and covers the period 1879 to 1934, while the study of the Federal Reserve Bank of New York City covers the years 1877 to 1934 and is for seven of the leading cities of the United States. All of these studies relate either directly to volume or to the value of building corrected for price changes.
From these studies it appears, according to the American experience, that building construction over the last hundred years has followed a fairly regular cyclical pattern. The Riggleman study reveals six building cycles from 1830 to 1934, with an average duration of 17.33 years. The studies of Long and Riggleman reveal four cycles from 1864 to 1934, with an average duration of 17.5 years. All four studies cover the period from 1878 to 1934 and reveal three cycles with an average duration of 18.7 years, while the period from 1900 to 1937 gives two cycles of an average duration of seventeen years. Thus, it appears that the building cycle averages somewhere between seventeen and eighteen years in length, or almost precisely twice the length of the major business cycle.
Question may be raised why building construction should have a cycle of its own different in length from th...