'1 11

ENCYCLOPEDIA OF

BANKING AND FINANCE

A REFERENCE BOOK COMPRI SING OVER 3,200 TERMS RE ­

i LATING TO MONEY; CRE DI T; BANKING PH ACTICE, , . HISTORY, LAW , ACCOUNTI NG AND ORGANIZA­TIO N ; FINAN CE ; FOH EIG N EX CHA~GE;I

TR UST S ; I N vE ST MEN TS ; SPECULATIO~ ;

INS URANC E; MARKET S ; BROKERAG E

BY

GLEN N G. MUNN, M. A ., Autho r of " Bunk Credit- Principles and Operating P rocedu re,"

and "The Puyi ng Teller's Departm ent"

Forme rly I nstruc tor in E conomi cs and F inance, N ew York Un ivcrs;·ty , ond W itl . the Clmse N uti onot Bonk , New Y ork City ; A ssaciat .

E ditor of Th e Bunkers /I.1a9a=illc ; Rail road Edi tor of the S tond­ard S tatis tics Conit-on», N ew Y ork City ; E ducationa l D irect or

and Lect urer i,£ B"'tking and ECOJ~o11l. icsJ Hud son County ( N , J.) Chapter, A lIIcrica" [ nst itnte of Ba"k illg ,

NEW YORK

THE BAXK ERS PUBLISHING COM PAl'Y

1927

if';.~:J:~'2~~. ,... _.f ·r..

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90 ENCYCLOPEDIA OF BAN K I NG AND FI NANCE

Distribution to Consumer : Depar tment store sales. Chain store sales. Mail order sales. Life insuranc e paid for . Real estate tran sfers. Magazi ne advertis ing. Newspaper advert ising.

General Business A ctivity : Ba nk debits , outs ide of New York City. Bank debits, New York City. Bank debits, 2nd Dist, excl. New York

City. Velocity of bank deposits, outside of New

York City. Veloc ity of bank deposits, New York City. Shares sold on New Yor k Stock Ex change. P ostal receipts. E lectric power . Empl oyment, N. Y. St ate factories. Business failur es. Build ing permits. (S ee Business Cycle, Busine ss Fo reca sting

Serv ices, Fun dament al Conditions, Invest­ment , Market Sent iment, Speculative Cycle.)

BIBLI OGRAP H Y L. GU ENTH ER: Investment alld Sp ecula­

tian (1916), Chap. 29. R W. BABSON : Business Barometers, 1918. D. F. JO RDAN : Business Forecasting, 1923. W. P. HAMIL TON : TIl' St ock Markel

Barom eter, 1922. C. H . Dow : S cientific Stoc k Specu lation.

1920. See also bibliogr aphy under Busin ess Cycle.

.BUSinessCycle

An interval which embraces alternating periods of business prosperity and depres­sion, It is one of the most significant phe­nomena of the capitalistic regime and ap­pear s to be an outgro wth of our modern cred it system in which prod uction takes_ place in 'advance of consumption. Business volume 'and commodity prices do not remain constant , but are subject not only to sea­sonal variat ion, but to long-term fluctuat ions. In other words, business travels in waves, and excesses of activity appear to be coun­ter acted by exces ses of depress ion. Bor­rowing from the physical sciences, Mr . R W . Babson, one of the best-known business forecast er s, constructs his theory of the business cycle on th e principl e tha t act ion and react ion are equal, or that periods of business prosperity in so far as they are in excess of norm ality, are compensated for by periods of depression.

Accor ding to th is last authority the busi­

ness cycle comprises four distinct phase s which are called the period of : (I) pros ­perity , (2) decline, ( 3) depression, and (4) improvement. S. S. Huebn er in his book en­titled "The Stock Market ," divides the cycle into five periods as follows : (I) business depressi on, (2) rev iving business, (.1) new enterprises, (4) intense prosperit y, and ( 5) violent liquidati on in secur ity mar kets.

Th e auth or divides .he business cycle into more or less distinct periods, enumerated and descr ibed as follows :

( I) Cris is- This is the turning point or decisive moment which marks the collapse of the period of prosper ity, inflation, extrava­gance and high prices. It is usually initiated by a buyers ' strik e as a react ion fr om high prices. Befo re the inaugurat ion of the Fed­era l Reserve System a crisis was likely to be followed by a pan ic. This is primarily a financial phenomenon charact erized by a collapse of the credit structure, universal demand for money payments , lack of confi­dence in the ability of debto rs to pay debts, and usually by a series of important business, brokerage and ' banking failure s. Bank s are the storm centers of panics, since everyone is exper iencing difficulty in securing an ade­quate supply of cash . If important failures occur, "runs" are likely to be made upon the banks, and a great str ain is placed upon the banking system. S ince no panics have oc­curred subsequent to the establ ishment of the Feder al Reserve System, and since reser ves ar e concentrated and mobile, and hand-to ­mouth curr ency readily available thr ough rediscountin g, it is 'believed that the country is now panic-proof.

(2) Emergency Liquidati on - Foll owing the cr isis (and panic if there is one) comes a peri od of emergency liquidation. During the previ ous period of prosper ity product ion has been at a high rate, leading to an over­.stocking of goods at high prices . Wh en the cr isis announ ces the end of the period of high prices, businesses are eager to unload or to "ge t out from under " before pric es decline further . Th ere is, moreov er, an over­supply of goods and a shortage of cash. Quantities of goods are, th erefore , placed on the marke t for what they will br ing .

(3) Depression-Th is is a period of "har d times" in which the disturbance in the normal equilibri um between supply and de­mand is still felt. Pr ices are low and efforts are made to work off the excess of goods. Th ere is a dra stic curtailment of producti on, resulting in . widespr ead unemployment , re ­duction or eliminat ion of profits , accumul a­tion of money supply thr ough the deflat ion

91ENCYCLOPEDIA OF BANKING AND FINANCE

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of credit, and a general practice of econ­omy. There is a constant "feeling for the bottom" in the price movement.

(4) Readjustment-When ehe ,bottom of the price movement has been struck, the period of readjustment begins. It is char­acterized by irr egular and uneven price movements which are in process of stabiliza­tion and harmoniz ation; also by sharp com­petition, lower production costs. elimination of the inefficient (numerous business fail­ures) but with the return of more cheer­ful sentiment.

(5) Recuperati on or revival-The period of readj ustment blends SO imperceptibly into the recuperative phase that the latter is not easy of detection. By this time the deflation prOCl:SShas been completed, bank reserves are high and interest rates are low. Lower prices begin to stimulate demand, first no­ticed at the retail stores. Recupera tion may be hastened by such propitious events as bmnper crops, increase in for eign trade, or a boom in building. The increase in retail de­mand communicates itself to the wholesaler, jobber and manufacturer, until normal con­ditions reappear .

(6) Prosperity - The economic forces which account for the revival also account for prosperity 'except that they act more in­tensely. As the demand for goods increases industry picks up, more labor and capital are employed, as a result of which purchas­ing power is increased. This, in turn, stim­ulates demand, and because stocks have be­come depleted production ' and deliveries lag behind orders . This condition leads to in­creased production costs and contract re­newals at higher rates . As costs advance, prices, wages, rents and interest rates rise. A large volume of business is being done on a ris ing mark et and business men are mak­ing large profits and laborer s high wages. For a time, at least, the prosperity is cumu­lative, since purchasing power increases in proportion .

(7 ) Over-ex tension and speculation- Un­fortunately the period of prosperity does not last . It contains elements of danger . Sooner or later businesses find exist ing facilities in­adequate to supply the demand. Thi s leads to an expansion of facilities acquired at high costs. Output is increased, but also at higher costs. The program of expansion has tight­ened credit and raised interest rates. but the lure of profits, due to r ising markets , pro­vides a powerful incentive for businesses to produce at the max imum. Prices rise, prof­iteering sets in, ex travagance in consumption. appears , and credit becomes inflated. In the

final stages, costs rise more than selling prices, due to the decline in the efficiency in labor , rising raw material prices, and higher interest rates . Speculation for further rise in prices tends to make prices rise higher than warranted, finally resulting in a buyers' strike . This leads to a crisis .

While a business cycle is a rhythmical phenomenon, it has no definite periodicity,

. e. g ., three years, seven years, or twenty years. No two business cycles are alike, but rather consist of a different combination of factors . The accompanying chart, published by the Standard Sta tistics Company (New York City) , shows the business cycles that have occurred in the United States since 1918. Th e business line in this chart is to be correlated with the curve of stock prices and money supply. It will be noted that the money supply line is the basis, or signal, upon which the other two lines take their cue. Just as the money supply line precedes the movement of the line of stock prices (th ough in opposite direction) , so the line of stock prices precedes the business line in both the upward and downward swings. (See Business Barom eters, Business For e­casting Services, Speculative Cycle.)

BIBLIOGRAPHY A. B. ADAMS: E conomics of Busin ess

Cy cles, 1925. W. M. P ERSONS AND OTHER S: Th e Pr ob­

lem of B...nlU!ssForecasting, 1924. E. M. H. LLOYD : S tabilizat ion, 1924. W. T . FO STER & W. CAT CH I NGS : Pr ofits ,

1924. W. C. S CHL UTER : Th e Pre -War Business

Cycle, 1924. G. F. W AIUU!N & F . A. PEARSON : The

Ag n c..l1....al Situatw.. , 1925. W. V. LANFEAR : B.......ess Fluctuat ions

and the American Labor Movement (1915­1922), · 1924.

M. B. H EXTER : S ocial Cowseouences of Busmess Cycles, 1924.

L. W. HAlL: Stlld y of Cycl ical Fluctua ~ tions O" ....,;,. g in the National Ban king S yst em Dllt'ing the Y ears 1 903-1921, 1924.

D. F . JOR DAN : Business Forecasting, 1923. R. VAN CE : Busin ess and I" vestment Fore­

casting, 1923. R. BA BSON : Business Fwsdam entals, 1923. H . L. MOORE: Generating ECOMm'" Cycles,

1923. H . B. H ASTING S : Costs and Profits , 1923. O. D. YOUNG AND OTH ERS : Business

Cycl es and UlU!mployment, 1923. . W. 1. KING : Empl oyment , Ho ....s and

Ear nings in ProsperiJ y and D epression, 1923. F . L AVI NGTON : T he torade Cycle, 1923.

J I

93 92 ENCYCLOPEDIA OF BANKING AND FINANCE EN CYCLOPEDIA OF BA NKI NG AND FI NA NCE

CONTROLLING POLICY OF FEDERAL RESERVE BANKS

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EXPLANATI ON OF CUR VE S IN CHART REA VY CU RV E ending with + sign depicts the ratio of deposi ts to loans of some 800 report ing

~~~~:dl i:-~e~~t~~mj::i : o~e:~~;ia~:'f~o~t~ror:~r.ecW~~sm~ii; ebs~f~a~:sl~e: tt~r br;l en;eh du~i~et ~: Ci~~kdsh~d~~tabr~r~ 1~~~ r~r~;-'N~r:~'1 ~:~~ f~~dA~tu~~OC;ed~r J~;pl~~~VYT~~~~~~~a~h~~~ ili~ic;, s~:~~~s t~f September I, 1923.

12 F~~~::.r R~~~~EBS:~k:~ t~~h~fredecp:~~d~n~uljP~Je::1 iR~~~~~~ Wot~hii;bi~~~ie~f c~o:~i::J~"iheOfa~~= marked with vertical lines. merely emphasizes the volume of the reserve credit supply . The curve is charted on a scale showing the actual reserve ratio. Normal (s ho.....n by the black horizontal line through

the ~I()LIJeg{JRvt ~~e th:a{j~JERr~~i~~Yofl~h~dchiJOdep ict5 the average rediscount rate of the 12

~~~ef:lw~I~~vvee ~~~t~t~~ ~i·fhO ~:yo~b:~~~:~. paft~~ho;:~Sh:uDrSJo ~i~iegNO~t~h~F:rc~~1 R~~~r:~ authoriti es to allow the reserve credit supply to be utilized.

SOLID CURVE in the LOWER eecn on of the chart shows the average price of 25 railroad and 25 industrial stocks. It is plotted on a. dollar scale.

acco::t?~~:;id~UJ-:WE Y~~klld~;. trTb~5 o~u~~:ini~ch~~~JY i ~:J r~l~~;~c~ ~e d:;~:a~~ ~~n~7~rb~~; period 1920·21 being taken to equal 100. Bank debits not beine available for the year 1918 and 1919. the curve for those years i.a based on bank clearings.

• Permission of Standard Statistic s Company, N ew Yo rk City.

F. PARSONS : Everybody 's Business, 1923. D. H. ROBERTSON : A Study of IndUstrial

Fluetuaticn, 1923 (English). L. D. EDtE (ED. ): Th e Stabilizaticn of

Business, 1922. W . A. BERRI DGE: Unemployment and Busi­

ness Cycles, 1921. W. F. HICKER NELL : B,mnes; Cycles, 1920. T. E. BURTO N : A Century of Prices, 1919. W. C. MIT CHELL : Bus iness Cycles, 1913. O. M. W. S PRAGUE: Hist ory of Crises

under the Nat ional Bankin.g S ystem, 1911. G. H. HALL : Indus/ri al Depressions, 1911. T . E. B URTON : Financial Crises and

Periods of Industrial amJ Commercial De­pression, 1907.

E. D. J ONE S : E conomic Crises, 1900. C. J UGLAR : A Brief H istory of Panics,

1897.

Business Failures See Fai lures.

Business Forecasting Services If cyclic movements of prices in commodi­

ties. securities and money actually occur, as explained under th e term Business Cycle (q. v.) , and business conditions and pr ice movements are subject to analysis and in­terpretation as ex plained under the term Business Barometers (q. v.) , then price movements become, in part at least, amen­able to scientific forecast. Whil e most busi­ness men recognize the validity of the prin­ciples underlying the business cycle and the importance of watching business barometers, -Iew regard themselves as capable of ana­lyzing and interpreting available data first hand. Business forecasting has, therefore, become a specialized profession .

Several statistical organizations are en­gaged in the business of selling business, speculative and investment forecast services. The best known of these organizations are : Babson Statis tical Organization , Inc . (Wellesl ey Hills, Mass.), Standard Statis­tics Company (New York City), Brookmire Economic Servic e (N ew York City), Har­vard Bureau of Economic Research (Cam­bridge, Mass.), Bankers' Economic Service (New York City) , and Moody's Investment Service (New York City). In addition, there are bulletins published usually for free distribution by banks, stock exchan ge corn­mission houses and bond houses.

Business and investment forecasting serv­ices arc sold out of recognition of the fact that the largest profits in business and in

speculati ve commitments are derived from anticipating price changes. If forecasts are accurately made they may become the source of increased profits for the subscribers. Th ese services are usually divided in sev­eral parts in order to make an appeal to business men who are primarily interested in commodity price changes and general business conditions, to speculators who are interested in stock and commodity mark et prices, and to investors who are interested in bonds. The Standard Statist ics Company, for example, offers a daily tr ade service which is a survey and for ecast of develop­ments in the general business field, including the financial, commercial, legislative, price and labor outlook, as well as the various key induslr ies which lie at the base of all business .

T he specific services offered by these or­gan izations separately, in combination, or complete, are listed below :

B ABSON

Business Service:

Weekly barometer letter with Babsonchart. Monthly supplement of statistical tables

and charts . Monthly bullet ins on commodit ies, labor

and management, and sales prospects ; advice to buyers and sellers.

Financial S ervice:

W eekly barometer letter with Babsonchart , Monthly supplement of statis tical t ables

and charts . Monthly speculative bulletin . Monthly investment bulletin .

STA NDARD STATISTI CS COMPANY, IN C.

Corporation card service . Bond card service. Daily corporation news service. Daily dividend service. W eekly dividend calendar . Stock offerings service. Wee kly bond bulletin. S inking fund notices and redemption calls

sheets. Bond book service. Monthly bond offerings. Tr ade and securities service . Investm ent service. Service on railroads. Fact s and forecasts . Canadian card service. Status of bends under Federal income tax . W eekly mark et le~ter .

'I'~ ,.