The Washington herald., 1921-04-22
IMPORTANCE OF BUSINESS
CYCLES Is RECOGNIZED
Artificial Optimism Not Sufficient to Change
Depression Into Prosperity.

The United States, in common
with the rest of the world. Is pass
Ing through what is probably the
most severe commercial crisis ever
known In nine months wholesale
prices have dropped more than 40
per cent, a greater decline than has
ever before been known in the
same length of time. This has ex-
erted an enormous strain upon busi-
ness and Industrial institutions. but
thanks to the Federal Reserve Sys-
tenn there has never been the
slightest evidence of a panic such
as characterized the depression Pc
riods of 1898 and 1907.
Ii is becoming more and more
recognized that there is general
rhythmic movement in business of
which the crisis" Is only a normal
phase. There Is good reason for
believing, too. that with better un-
derstanding of the business cycle
in which the. crisis is followed by
depression, depression by prosperity
and that again by crisis, 1t will be
possible to gain better control of
it, II we could minimize the ex-
travagance of the prosperity period
it might be possible to lengthen
this portion of the cycle, and to
render the period of reaction less
severe.
The end of a period of depression
is characterized by low prizes. low
wages, narrow margins of profit.
reduced costs. high bank reserves.
reduced stocks of commodities, and
conservatives policies with regard
to buying. borrowing and capitali-
zation. During such period,
which ordinarily lasts a year or
more. stocks of commodities are
consumed and equipment and raw
materials reach a minimum. Final
Iy, point is reached where those
in a position to do so are forced to
begin new buying. Investors and
conservative business men who sold
cut their holdings at high prices
finally reach the conclusion that
prices are at the bottom and a new
period of buying is instituted which
Is gradually reflected back through
jobbers and wholesalers to the. man.
ufacturers. This increase in indus
|try results in more employment and
that in turn in more buying.
This continues until we again
reach a period Of prosperity. char
acterized by higher prices. larger
profits. high wages. Industrial over
expansion. labor inefficiency, high
costs of production. etc. This in
turn leads to the inevitable crisis
and the cycle Is repeated.
IL it were possible to limit un-
wise expansion and extravaganza
this prosperity period would be pro-
!onged beyond its usual duration of
six to twelve months. In this con-
ncction the bankers of the country
ran, be of the greatest assistance.
Tanks are in close. touch with all
Sinds Of business, and they are in a
better position. to realize the dan
=cr point than any one else. They
have a vast power through their
ability to increase or curtail loans.
In the future one of the big func-
tions of the Federal Reserve Board
should be its guidance of bankers
throughout the country in the mat
.er of policy. Perhaps ali they can
10 ordinarily and all they should
10 is to act in an advisory way. 1t
would be extremely unwise to at
tempt to force any policy upon the
banks or the public. but the unbi-
ased presentation and interpreta-
llCH Oi FACTS VIII nave d VAST lnHu-
ence.
During the period of revival
which usually lasts from one to
two years-the recovery of various
industries and the rise in prices is
by no means even. Liquidation in
certain lines goes farther than in
others and the recovery likewise
differs in degree.
Economists recognize that an inn
portant element in. the revival OF
business is the psychological atti-
tude. The man who finds business
in his own line expanding becomes
an optimist with regard to business
in general. Other men, even though
they themselves have not felt in
creased orders for their own goods,
are influenced by this optimism.
This psychological change, intangl-
BILE and partly non-rational. is a
factor of great Importance and one
which must be reckoned with.
Recently there have been at
tempts to stimulate this psychology
ical reaction artificially. There are
many men who believe that our
whole present dif1culty is nsvcho-