The Washington herald. [volume] (Washington, D.C.) 1906-1939, 1921-11-06
CREST OF CYCLE
TIME TO PREPARE
FOR DEPRESSION
Cooperation of ALI Bust
ness. Factors Then
Needed.
TO CHECK INITIATION
Speculation During Prosper
ity Sure to Bring
Reaction.
TO CHECK INITIATION
by EDWIN M. KREMMERER.
Professor Of Economics and Finance
Princeton University.

cycle would be reduced il the public
could anticipate the movements that
constitute the normal cycle and dis
count them Economic movements
that are widely anticipated are
thereby either prevented from TAX
ing place or modified in their occur
renee.
Assume for example, that the evi-
dence at particular time shows we
are several years along on the ris-
ing curve of a business cycle, that
there has been no substantial fiqul-
dalton for two or three years, that
speculative activity Is running high
on the exchanges, that prices of the
more speculative stocks are rising,
that bank clearings are large, thar
reserve ratios at Federal Reserve
banks and commercial banks are
tending downward, call and short
time interest rates and Federal Re-
serve discount rates rising, the
ratios of bank loans to deposits in
creasing, credits becoming more
and more extended, and that COM
mercial failures for some time have
been running abormally low, show
ing that little dead wood has Of
late been cut out of the business
structure. This. for example, is a
substantially correct picture of the
year 1906, and of the latter part or
1919, and the early part of 1920,
Fundamental / crop conditions at
such a time may or may not be
good-if they are poor, so much the
worse-but the other conditions
mentioned would be ominous, and
particularly so IL they were occur
ring as above assumed at some
where near the time period when
according to past experience, the
cycle might be expected to be ap-
preaching its crest.
what Would Banker Do.
Under such conditions what
should a far-sigbted and prudent
banker do? The answer Is the same
, as il would be to the question:
What have the few most far-sight-
ed and prudent of our bankers done
under similar conditions in the
past?
Broadly speakig, he would do =
number Of the following things:
First of all he would probably try
to get his assets in a more liquid
condition. He would sell his less
giIt-sdg securities while the SELL
ing was good. and place the pro-
ceeds either in the most gilt-edged
securities on the market-the kind
that ordinarily suffers least in
period of crisis and that usually
alone advances during the early
part of the ensuing depression-or
he might purchase with the pro-
ceeds prime commercial paper OF
short maturities, scattering well
his risks He would place larger
proportion of his resources in the
hest commercial paper of concerns
outside of his own community
whose businesses were Of the kinds
least affected by crises-concerns
whose paper he would have no re-
sponsfbility to renew at maturity.
He would clean up his loan &C
counts with his Federal Reserve
hank and with his correspondent
hanks, and strengthen his reserve
position. He would get a larger
proportion of his paper into snort
maturities and would bring pres
sure to reduce his capital loans,
the kind that have formed the re
newal habit"
business should Curtall.
The general plan of action that
he adopted for himself he woulo
suggest to many of his customers.
He would advise them of the danger
of an undue extension of capital at
NSiIch a time. and Of the danger OF
too large an inventory, Of too heavy
commitments in the purchase OF
raw materials. and of overeXtended
-,redfts to customers. In a word the
banker would himself play safe and
would urge his customers to do ike
wise. He might be premature In
his action: II so, he could console
himself with the thought that 1t Is
better to be safe than to be sorry
that he moved in the right direction.
aha that the very pfematurity OF
himself and Of others who acted
ike him contributed, towards
stabilizing the situation.
The pressure Of the market is so
. much more likely to be exerted
on the side of undue optimism at
such time that the danger of be-
ing too late in making such
preparations is greater than that
of being too early. 1t makes for
stability moreover-for a less wide
Is fluctuating adjustment curve
if bankers and busirCss men will
diner to a. reasonable extent as to
the proper time for adopting such
measures, and will therefore have
ferent points in the rising cycle.
The effect of their actions then be-
comes cumulative.
Banker Would PROFIT.
The extensive adoption of such a
poIicy-ou the part of bankers would
retard the upward swing of the bus
mess cycle and prevent it from go
ing SO far as II otherwise would.
1t would likewise eliminate the
necessity of a corresponding down
ward swing-in other words, it
would tend to iron down the curve
and make for business stability.
This would be a social gain. but it
would also probably yield a finan-
cial profit both to the banker ana
to the customer who followed his
advice. An Intelligent discountins
bf the economic and financial ru-
ture always pays.
In the above illustration 1t was
assumed that the cycle had been
rising for some time. and was ap-
parentfy approaching its crest; the
situation would be reversed IL the
cycle had been a declining one. In
such a'case a process of liquidation
would have existed for some time.
the record of business failures
would have been relatively high,
stock exchange activity compare
lively low, with the prices of the
more speculative securities either
stagnant or tending downward. and
those of the most gilt-edged In
vestment securities relatively high
as comDared with other Reeuritles