Warren M. Persons

A Commodity Price Index of Business Cycles

T HE object of this study is to construct an index of wholesale commodity prices for a special purpose. That purpose is to measure changes in general business conditions during alternating periods of prosperity and depression. In other words, our problem is to select and combine seriesof wholesale prices of commodities in order to secure an index of business cycles. This is not the problem which, heretofore, makers of commodity price index numbers have had before them; their problem has been, rather, to measure changes in the cost of living or in the general exchange value of money. The price index of business cycles, which we present here, is a new type of index number constructed by methods adapted to the special object in view.

Cyclical Fluctuations of the Ratio of Bank Loans to Deposits, 1867-1924

BOTH the month-to-month fluctuations and the long-time trends of (a) loans and investments, and (b) net deposits of New York Clearing House banks are highly similar. For I903-I3, a period for which the fluctuations were carefully examined in a previous study, the correspondence between the seasonal and cyclical movements of the two series was found to be remarkably close and the slopes of the linear secular trends were shown to be identical.2 The range of fluctuations of the actual figures for net deposits, however, is much wider than that for loans and investments.3 Thus, in years of business depression, such as I904, I908, and I9II, when loans and investments of New York Clearing House banks rose to relatively high levels, it was found that net deposits rose even more. Also, in years of active business, such as I903, I906-07, and I910, when loans and investments declined to low levels, net deposits fell still lower. As a consequence of the lesser range of fluctuations of loans and investments 4 than of net deposits, the ratios of the items of the first series to corresponding items of the second series were found to exhibit marked cyclical movements. Furthermore, the timing and general contour of the cyclical movements of the curve representing the loan-deposit ratio were found to agree closely with those of the curve representing rates on commercial paper adjusted for seasonal influences. This agreement, for the ten or eleven years preceding the war, is evident from the comparison in Chart 2 of the loan-deposit ratio and rates on commercial paper.5 Thus the process of taking the ratio of loans and investments to net deposits of New York Clearing House banks results in a series fluctuating concurrently with money rates and, at least for the decade preceding the war, furnishes a supplementary index of money conditions. The crests and the troughs of the cyclical fluctuations of the loandeposit ratio, it should be noted, come at quite different times from those of the constituents of the ratio. That is, the trough of the curve for ratios comes in times of business depression and the early stages of business recovery, when the curves for loans and investments and net deposits of New York Clearing House banks are high; the crest of the curve for ratios comes in times of business prosperity and financial strain, when the curves for loans and investments and net deposits are low. The object of the present study is to ascertain if the loan-deposit ratio (or possibly, the loanliability ratio) is an accurate index of money conditions for other periods than the decade preceding the war and for other banks than those belonging to the New York Clearing House. The reason for studying the ratio of loans and investments to deposits (or, the ratio of loans and investments to total liabilities) rather than the individual series of loans and investments by itself is threefold. First, as stated above, the loan-deposit ratio furnished an accurate index

A New Index of Industrial Production and Trade

trade around the rising line of trend determined from the annual indexes. Crop production, Curve II, likewise advanced during the interval, but at a slower pace than industrial production and trade. Industrial and agricultural production combined, Curve III, follows the year-toyear fluctuations as well as the trend of industrial production and trade more closely than those of agricultural production. This is a result of the greater weight given to industry and trade than to agriculture because of the relatively greater importance of the former in our economic life. The percentage increases of the ordinates of the trend lines for I932, as compared with I899, for each of the three groups shown in Chart i are: (I) industrial production and trade, I 76 per cent; (II) crop production, 48 per cent; and (III) these combined, I32 per cent. The three years, I930-32, record a decline in physical production far exceeding that of any other period in the interval covered. Using the annual figures, the decline from I929 to I932 in the combined index is fully 4o per cent, as compared with a drop of less than I7 per cent from I920 to I92I, and ii per cent from I906 to I908. In other words, the most recent depression may be described as a major economic decline followed directly by another equally severe collapse. The, index of industrial production and trade, here presented, is constructed from series representing six major industrial groups: manufacture, wholesale and retail trade, railroad freight traffic, building construction, mining, and electric power production. Each of these series is presented in Chart 2 (next page), on a ratio scale in order to bring out rates of growth. Among the major groups, electric power production expanded most rapidly, while the volume of manufacture, wholesale and retail trade, railroad freight traffic, and mining grew more gradually. Building construction, on the other hand, exhibits no clearly defined trend, either upward or d wnward. We may rema k, however, that the index of building construction is based on estimates of the value of construction deflated by an index of building costs and the figures are less dependable, previous to I919, than those for any other series included in the present study. In fact, it is impossible to say, on the basis of available data for building construction, what the long time trend of construction actually was. The series is included, nevertheless, because reliable figures are available for I919 and after. Just as the industrial groups represented by the six constituents display divergent rates of growth of physical output, so their relative economic importance, measured in dollars, varies widely during the period covered by the index. 1 The index for total crops (agriculture) is that of Warren and Pearson, Prices, pp. 44-45. Although live stock is not included, feed crops as well as food and other crops are included, and the index measures agricultural production relative to the base period.

The Production of Electricity as an Index of the Physical Volume of Business

which is free from the influence of prices. Bank debits, which afford the most general index of business activity, measure the dollar volume of transactions made through checks, and hence reflect the prices of goods, services (i.e., wages in general), and securities, as well as the volume of transactions; whereas most series expressed in physical units, however well they may reflect general movements, actually apply to some particular phase of activity, such as freight shipments or manufacturing.

Car Loadings As an Index of Trade Volumes

time trend, reflect the physical volumes of trade and manufacture of the United States. Such figures for total loadings for i919-August I926 are presented in Table 3, and graphically in the lower part of Chart i. The adjusted index of total loadings this year, like indexes of general business and manufacturing activity, though fluctuating at a high level, suffered a moderate recession in the spring and early summer months and not until July did it rise. The recession was not apparent from the actual figures, which moved persistently upward; but this upward movement from March through June was in fact less than the usual seasonal advance, and our adjusted index therefore declined. The decline, though definite, was not extreme, and the index remained above normal throughout this period. In July, the increase in the actual figures was greater than usually occurs in that month, and resulted in the upturn referred to above.

An Index of Trade for the United States

THE Index of Trade, presented in the folded chart opposite this page, is designed to give a view of the combined fluctuations of trade, transportation, manufacturing activity, and industrial employment in the United States, month by month since I903. The Index is based upon representative statistics, but certain statistics are not available throughout the entire period and others, being expressed in terms of dollars, do not accurately reflect fluctuations in the physical volume of trade since the war. Consequently, it has been necessary to use somewhat different selections of statistics for the intervals I903-I5,9I5-I9, and I9I9-23, and all statistics expressed in terms of dollars have been excluded since I9I4. The actual overlapping curves for I9I5 and I9I9 are shown on the chart, the initial years of the intervals I9I5-I9 and I9I9-23 being plotted as dotted lines. All the statistical series utilized throughout were adjusted for long-time trend and seasonal influences before averages were taken, so that the resulting index depicts the percentage deviations from normal of the combined figures for trade, transportation, manufacturing activity, and industrial employment. The Index is an average of the corrected figures of diverse statistical series, such as bank clearings outside New York City, the value of imports of merchandise, gross earnings of leading railroads, production of pig iron in tons, and the relative number of wage earners employed in industrial establishments. The justification for combining such diverse series into a single average is twofold: economic and statistical. The economic reason for averaging the series is that together they reflect wholesale and retail transactions, domestic and foreign trade, the volume of transportation of all classes of goods, the activity of railroads, the volume of manufacture, and the purchasing power of wage earners. In other words these particular series are selected from the available data because they are themselves indices of economic conditions in trade, transportation, manufacture, mining, and agriculture, and then they are combined because, taken together, they touch business at many more points than does any one series alone. The statistical reasons for combining the series are: First, the major movements accompanying the ebb and flow of industrial activity of these series are very similar as to the timing of advance and recession2 and, therefore, the average fluctuates in a manner representative of that of each constituent series. Second, the minor irregular variations accompanying strikes, transportation congestion, and the like of the various series are very much moderated when a number of corresponding items are averaged. The average, therefore, may be expected to soften or iron out minor variations and to throw into relief the general ebb and flow of trade. For the period since the outbreak of the war in I9I4, as has been said, we have not included in the Index of Trade statistical series expressed in terms of dollars bank clearings, for instance -although we did include such series previous to I914. The reason for this difference of treatment of the two periods is to be found in the nature of price fluctuations before and after the war: previous to I914 fluctuations in the dollar amount of transactions reflected (approximately, not exactly) corresponding fluctuations in the physical amount of trade, but after I9I4 the violent rise and fall of commodity prices destroyed this correspondence. It is possible to utilize as the material for a continuous index of the physical volume of trade for the last eight years of violent price changes only such series as are expressed in physical units. For the intervals I9I5-I9 and I9I9-23, therefore, only such series are selected for the Index. In the choice of the current group of series still another criterion has been used: since promptness is essential, only those data are utilized which become available for each month by the middle of the following month.

Bank Loans and the Business Cycle

T HE curves of our Index Chart for I903-I4 were obtained by sorting twelve statistical series into three groups of four each, and then averaging the series of each group. The criterion for sorting the series was statistical; that is, when corrected for seasonal influence and normal growth the series of each group moved in the same general direction (upward or downward) at the same time. The three groups, however, did not undulate simultaneously but moved in a well defined sequence. After the statistical analysis of the series had been completed, it was noticed that the series of each of the three groups possessed economic similarity as well as