A History of American Business Cycles

A HISTORY OF

AMERICAN

BUSINESS CYCLES

Thomas Kevin Swift

A History of American Business Cycles

Copyright © 2023 Thomas Kevin Swift

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Contents

Preface and Acknowledgments

1 On Business Cycles

Introduction

Understanding and Defining the Business Cycle

Stages of the Business Cycle

The Role of the Entrepreneur

Law of Markets

Internal Forces: The Cause of the Business Cycle

Inflation has Different Meanings

Credit Disturbances as a Cause of the Business Cycle

Other External Forces and the Business Cycle

Lengths and Types of Business Cycles

Signs of Peaks and Troughs

2 On Measuring Business Activity

Introduction

Need for a Measure of Business Activity

Concept of Gross Output

A New Measure of Real Business Activity

3 Revolutionary War to Civil War

Introduction

Prelude: The American Revolution

Cycle 0: Depressed Conditions and Emergence of a New Republic

Cycle 1: Seaborne Commerce and the Panic of 1796-97

Cycle 2: Carrying Trade Prosperity, Peace of Amiens, and the Recession of 1801-03

Cycle 3: European War, Maritime Commerce, and the Embargo Depression of 1807-09

Cycle 4: European War, Restricted Carrying Trade, and the Brief Recession of 1812

Cycle 5: War of 1812, Post-War Depression, Expansion, and the Panic of 1819

Cycle 6: Era of Good Feeling (I) and the 1822-23 Recession

Cycle 7: Era of Good Feeling (II) and the Panic of 1825

Cycle 8: Jacksonian Era and the 1833-34 Recession

Cycle 9: The Panic of 1837

Cycle 10: Brief Boom, the Panic of 1839, America’s First Great Depression, and Debt Repudiation

Cycle 11: The Mexican American War and the Mild Recession of 1846

Cycle 12: Mexican-American War and Crisis in Europe

Cycle 13: Post-War, Gold Rush, and Railroad Prosperity

Cycle 14: Panic of 1857

Cycle 15: Prelude to Civil War and the Succession Recession of 1860-61

4 Civil War to World War II

Introduction

Cycle 16: Civil War Prosperity and the Primary Post-War Depression

Cycle 17: Recovery and Secondary Post-War Depression

Cycle 18: Panic of 1873 and the Long Depression

Cycle 19: Gold Resumption Prosperity and the Crisis/Depression of 1884

Cycle 20: Recovery and Railroad Prosperity I

Cycle 21: Railroad Prosperity II and the Panic of 1890

Cycle 22: The Panic of 1893

Cycle 23: Revival of 1895 and the Silver Campaign Depression

Cycle 24: Splendid Little War Prosperity and Mild Post-War Recession

Cycle 25: Merger Prosperity and the Rich Man’s Panic of 1903

Cycle 26: Corporate Prosperity and the Panic of 1907

Cycle 27: Recovery and Mild Panic of 1910-11

Cycle 28: Progressive Era and the War Recession

Cycle 29: War Prosperity and the 1918-19 Influenza Pandemic

Cycle 30: The Forgotten Depression

Cycle 31: Recovery, the Roaring 20s, and the 1923-24 Recession

Cycle 32: Coolidge Prosperity and the 1926-27 Recession

Cycle 33: Bull Market Boom, Stock Market Crash, and the Great Depression

Cycle 34: Slow Recovery, Experimentation, and FDR’s Depression

Cycle 35: War Prosperity and Transition to a Consumer Economy

5 Post-World War II to the Present

Introduction

Cycle 36: Transition to Consumer Economy and Brief Recession of 1949

Cycle 37: Korean War Prosperity and Post-War Recession

Cycle 38: Golden Age of American Prosperity and Recession of 1958

Cycle 39: End of 1950s and Mild Recession of 1960-61

Cycle 40: The Go-Go 1960s, Heyday of Keynesian Economics, the Rise of Inflation, and Recession of 1970

Cycle 41: Wage and Price Controls, the Decoupling from Gold, Inflation, Oil Price Shock, and Recession of 1973-75

Cycle 42: Stagflation, Second Oil Price Shock and 1980 Recession

Cycle 43: Stagflation, Second Oil Price Shock, the 1980 Recession and Volcker, the Taming of Inflation, and the 1981-82 Recession

Cycle 44: The Heyday of Supply-Side Economics, a Long Expansion, the Gulf War, and 1990-91 Recession

Cycle 45: The Great Moderation and Long Expansion of the 1990s, and the Internet Bubble and Bust

Cycle 46: The Housing Bubble and Bust, and the Great Financial Crisis

Cycle 47: Slow, Long Economic Recovery and the COVID Recession

Cycle 48: From the Pandemic: The Start of a New Cycle

Epilogue

Bibliography

About the Author

Preface and Acknowledgments

The genesis for this book was during my graduate studies at Case Western Reserve University (CWRU) in the 1970s where I developed an interest in business cycles. It was possibly before that as a chart of booms and busts titled American Business Activity Since 1790 was often published in various American high school and college American history texts. I had found the chart fascinating and would later learn that it was developed by Leonard P. Ayres (1935) and was a staple of the Business Bulletin published for decades by The Cleveland Trust Company.

Economics had fundamentally changed (and not in a good way) after the publication of Keynes’ General Theory of Employment, Interest and Money (1936), and the older theories of the business cycle and the analytical approaches to assessing business cycles had long fallen out of favor by the 1970s. The Sears Library at CWRU provided a table of books taken out of circulation offered for sale at 10 to 25 cents apiece. During my graduate studies, I purchased a variety of discarded texts on business cycles. Some were classics, and some were by relatively unknown authors. All helped in some way with my economic thinking because it is the cycle (and where we are in it) that is important. I also managed to buy (and read) such texts dealing with practical foundry management and similar applied texts, which helped during my career as a business economist and consultant to industry.

In my career, in addition to my focus on industry economics, I was also intrigued by the interaction of markets, industries, and the tactical and strategic responses of companies to the business cycle. While many business economists focus on analysis and forecasts of key U.S. economic variables (real GDP and its components, interest rates, inflation, income, employment, industrial production, house prices, etc.), I concentrated on the interaction of strategy and economic developments and industry dynamics within this cyclical context. I’ve found the influence of the business cycle to be of greater importance, and more interesting and rewarding. Working as a consultant to industry confirmed the importance of the business cycle as a critical determinant of corporate performance in general, and profit and loss, as well as equity performance over the intermediate term.

What happens today is the result of events of yesterday, and what will happen tomorrow will be the effect of causes presently operating. That is, what happens occurs as the consequence of previous states of things, and the predetermination of economic developments is predicated on sound knowledge of existing conditions. This forms the basis of intelligent forecasting.

The purpose of this book is to examine the various business cycles since the formation of the United States in 1789. At the time of this writing, I count 47 complete business cycles. The 48th commenced in April 2020 after the short (two months) and deep recession that started in February 2020 when the advent of the coronavirus pandemic was fostered by government-mandated lockdowns of wide swaths of the economy. For convenience, I count cycles beginning at a trough in real gross output. I then define the complete cycle as from trough to trough. This makes sense since the seeds of the downswing of the cycle (recession) are often sown in the previous upswing (recovery and expansion).

This book uses a measure of economic activity — a monthly index of the volume of (or real) gross output — developed by the author to gauge business cycles. This monthly index is better than quarterly measures of GDP and in a way just as comprehensive. Although a multitude of measures is preferred, a paucity of time series exists. As is appropriate, measures of the output of leading industries are provided.

I was a history major and never took an economics course as an undergraduate. At my first job, I was at a meeting in Milwaukee and had some spare time. I wandered into a bookstore and found a copy of Samuel Hollander’s Economics of Adam Smith. I picked it up because I had heard of this Adam Smith and thought knowing something about economics might help in a business career. I bought it, read it, and found economics to be fascinating. In 2012, I tracked Samuel Hollander down (he had retired) and thanked him. My graduate macroeconomics education was largely Keynesian, with a little monetarism thrown in. In my first job out of graduate school, I found that Keynesian economics didn’t explain the real world of the early 1980s. So, I went back to the classical economists and the students of the business cycle. The approach in this book uses the framework of classical economics to examine the business cycle. There are other approaches (Keynesian, monetarist, etc.), however, that focus on demand. These are not included in this book.

My framework for understanding the economy starts with this production side of the economy: the entrepreneur (in the original sense of the word) and the law of markets. I view recessions as a failure in the structure of supply and demand and credit imbalances. Downswings are fostered by entrepreneurs miscalculating what consumers wish to buy, thus causing unsold goods to pile up (i.e., inventories), production to be cut, employment and incomes to fall, and finally consumer spending to drop. These failures in the structure of supply and demand are usually fostered by loose money and credit creation.

This book is meant to supplement popular texts on American history and will also prove useful to business leaders, practicing business economists, investors, public policymakers, and others. All happy families are alike; each unhappy family is unhappy in its own way is the opening sentence of Tolstoy’s classic novel Anna Karenina. Like unhappy families, no two business cycles are the same.¹ There are many ways for industry and market level imbalances to arise and for money and credit inflation to foster boom and bust episodes. That said, there are many similarities among cycles, and a study of past cycles can inform the present and provide a better assessment of the future. In my view if you don’t see the big picture, you won’t see the next cycle. Our knowledge is often based on what we experience, a small chapter in the sweeping history of America, which guides our view of the world, and a reason we often miss the tides and timing of economic movements. Studying business cycle history makes business leaders, investors, and others better prepared to weather cyclical vicissitudes. My specialty is in business economics, and I have always viewed that as the integration of economic theory with business practice to facilitate decision-making, problem-solving, and planning by management. In addition to integrating corporate culture with strategy, assessing changing market dynamics/industry structure and turns in the business cycle are the major tasks of outstanding business leadership that determine success. Understanding the past is essential to preparing for the future.

A knowledge of past cycles proved fruitful when the coronavirus pandemic and associated lockdowns fostered a recession in early 2020. I was quickly able to assess what happened during the 1918-19 influenza epidemic and the short seven-month recession associated with that episode. Lessons drawn provided insight for potential scenarios in 2020. Knowledge of the past supports good forecasting and decision making.

The current research does not pretend to develop new knowledge or explore theory, but to provide a clear, concise, and readable history of business cycles in the United States. I write this book so that it will be accessible to a broad readership. For this reason, I avoid discussion of previous scholarship and employ limited footnotes and no other academic conventions. Academic and technical terms are avoided as much as possible, and this book is not meant to be scholarly research. I do draw upon some of the great economic historians and business cycle scholars. I plough no new fields and claim no original thought, but rather harvest the work of others listed under Bibliography in the back of the book. The cycles since 1970, however, do reflect the records and recollections of this participant in history. My hope is that the current research will inspire others to reconsider the past. I am inspired by two quotations, one ancient and one modern:

…and there is nothing new under the sun.

—Ecclesiastes 1:9

A knowledge of the past prepares us for the crisis of the present and the challenge of the future.

—President John F. Kennedy

Chapter 1 presents a review of business cycles; what they are, what happens during the cycle, and a summary of orthodox theory explaining the cycle. Chapter 2 presents a review of gross output and a short summary of the data sources and methodology. Chapters 3 through 5 provide a short history of the business cycles during the post-Revolutionary War through the end of the Civil War, from the Civil War through the end of World War II, and in the post-World War II period until the present. Each chapter will include sub-chapters on each cycle, as illustrated by the index of the volume of real gross output and other relevant data, as well as a succinct history of events and distinctive characteristics of each.

My economic thinking is influenced by Adam Smith, David Ricardo, Jean Baptiste Say, Francis Wayland, Arthur Latham Perry, Alfred Marshall, Joseph Shield Nicholson, Henry Clay, and most recently, Milton Friedman, Arthur Laffer, Thomas Sowell, and Steven Kates, and, of course, Chauncey Gardiner. I am forever indebted to the business cycle research of Arthur B. Adams, Leonard P. Ayres, Gottfried Haberler, Edward C. Harwood, Clement Juglar, Philip A. Klein, Frederick Lavington, Wesley C. Mitchell, Geoffrey H. Moore, Joseph A. Schumpeter, and Carl Snyder. And Lakshman Achuthan of the Economic Cycle Research Institute (ECRI), who showed me that the business cycle approach to forecasting turning points was still relevant.

I am grateful to Susan Hoffer McMillan, my editor and renown author and historian. I am particularly grateful to Emma Ruth Nantz (my best student ever) who reviewed the draft and provided essential final editing. I’m equally indebted to Anne Malarich for her advice on publishing. I also want to thank Jenna Swift for reviewing an early draft of several chapters. My biggest thanks are due to my wife Sherry, for her patience throughout this project. Finally, I’m thankful for everyone who reads this book.

¹ I likely came up with the idea to use this quote from Ed Yardeni, a brilliant business economist, and president of Yardeni Research, Inc., a provider of global investment strategy and asset allocation analyses and recommendations.

CHAPTER 1

On Business Cycles

Introduction

Many forces are constantly operating in the world of commerce, industry, trade, and finance that comprise business.² Business conditions are never static. They are constantly undergoing change. Changes occur in some branches of business which do not align with corresponding changes in other branches. Forces determining the demand for a given good operate independently of forces determining supply, with the result that the market for the good is disrupted until a change in prices can bring it back into balance. This is the essence of price discovery, which is essential for economic efficiency. Both supply and demand provide for this price discovery within markets.

Forecasting is seeing in advance or anticipating the direction of these forces, these future conditions, and trends. Success is knowing what is going to happen to business conditions in advance of others. The purpose of this volume is to better understand and analyze these forces so that an intelligent opinion may be framed to their effect.

Understanding and Defining the Business Cycle

Known as alternative periods of prosperity and decline — of business activity and dullness — business cycles are not new. Genesis 41 records the seven fat years and seven lean years of Pharaoh’s dream, which Joseph interpreted. This was perhaps the first record of boom and bust, prosperity and decline. Boom-and-bust cycles (and financial panics and crises) occurred in the ancient, medieval, and into our modern era. These cycles can foster powerful social consequences, in addition to the usual economic outcomes.

The occurrence of these cycles has been noted for centuries, and the underlying causes have attracted the attention of leading economists, from Petty to Smith, to Ricardo, Mill, Mitchell, Keynes, and others. The birth of the business cycle can be located in England soon after the Glorious Revolution of the closing decades of the seventeenth century. Sir William Petty (1623-1687) had referred to them as successions of dearth and plenty. A wide variance of opinion exists as to the cause of these fluctuations in business activity an even greater diversity of opinion exists on whether or how these cycles can be controlled.

The modern concept of the business cycle emerged in the early twentieth century and was largely completed mid-century by Wesley C. Mitchell and Arthur F. Burns. They took the indicator approach that uses cyclical economic indicators to explore patterns of economic fluctuations. Their definition:

Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic; in duration business cycles vary from more than one year to ten or twelve years; they are not divisible into shorter cycles of similar character with amplitudes approximating their own. Burns and Mitchell, 1946

The two quarters of declining GDP is not an adequate definition, nor a proper criterion for a recession. In fact, the 2001 recession was not marked by two successive declines in quarterly GDP. Rather, the historical dates of U.S. business cycle peaks and troughs are based on the consensus of the dates of the peaks and troughs in the broad measures of GDP, as well as industrial output, employment, real (i.e., inflation-adjusted) personal income (less transfer payments), and real business sales, among other metrics. These properly mark the start- and end-dates of recessions. That is, the peaks and troughs. The Dating Committee of the National Bureau of Economic Research (NBER) is the arbiter of peaks and troughs, and maintains an up-to-date list of business cycle dates, which is available at www.nber.org. I have used NBER’s dating of business cycles (peaks and troughs) back to 1854. I also calculate the changes in real gross output using the NBER dates. For cycles prior to 1854, I suggest my own business cycle dates.

Referred to as trade cycles in the United Kingdom and economic cycles more broadly, business cycles are fluctuations in the movement in aggregate economic activity as measured by the gross domestic product (GDP) and other indicators (measures). Cycles refer to a series of stages in economic activity as it expands and contracts. They are intervals of expansion followed by contraction in economic activity. The idea that there is any regularity to these cycles is not true. In this sense, there is no such thing as a business cycle, as there is no circle of events through which business must pass. There are, however, similarities among different periods of expansion and contraction through time and also among different industries and sectors.

Stages of the Business Cycle

With a knowledge of the stage and characteristics of business cycles, a means of assessing the current situation and the likely future is possible. Commerce, industry, trade, and finance (i.e., business) at any point in time is either in one of two stages – a period of expanding activity or a period of declining activity. In the 19th and early 20th centuries, these were referred to as 1) prosperity and 2) depression. I employ the terms upswing and downswing and prefer the simplicity of a two-stage rather than four- or even six-stage cycles suggested by some business cycle theorists and practitioners.³ Moreover, at any given time, different industries will be in different stages of a cycle, but in the aggregate, they will tend to correlate with each other. That is, to follow each other. The terms upturn and downturn, as well as expansion and contraction, are used interchangeably with upswing and downswing.

Sometimes business is in a period of transition between the two stages. In the transition between expanding and declining activity, this transition period is referred to as a business cycle peak. In the transition between declining and expanding business activity, this transition period is referred to as a business cycle trough.

A crisis (or panic) often marks the transition from the upswing to the downswing and, as a result, enables the two stages to be easily differentiated. It is often harder to distinguish, however, between the end of a downswing and the beginning of the upswing or expanding activity. Panics and crises are not regarded as separate stages. This is because the transition from expanding to declining business activity often transpires without their occurrence, and in many ways, they can be regarded as the final phase of upswing period. It is often difficult to precisely date the start of a crisis. On the other hand, panics may be dated with more assurance.

A crisis is the state of business conditions when it becomes apparent that, for one or more reasons, business cannot be conducted further in the same manner as in the immediate past and, as a result, a readjustment is needed because of the instability (or maladjustment) of production. That happens when a larger proportion of businesses than usual finds that they are producing goods or services that cannot be sold at prices that cover production costs, or credit availability is exhausted. Financial panics are often preceded by credit booms. A crisis often comes out of the blue, and it appears that things are falling apart. In actuality, the challenges had been brewing for a while beneath the surface. No single spectacular event occurring on the eve of a crisis is the cause of the crisis. In nearly all cases, the seeds had already been sown, often years before. Attention must be given to the conditions which precede, rather than to those which accompany the crisis. The causes are very numerous and complex. A financial crisis reveals large, widespread miscalculation of economic values. The extent of these miscalculations has to be worked out before the economy can begin to function normally again. The ending of a crisis is marked by cessation of large demand for prompt liquidation. Early crises were largely credit contractions brought on by monetary manipulation. They were quite common during the 19th century but with the creation of the Federal Reserve, and more importantly deposit insurance, America didn’t have any major crises between 1934 and 2007.

A panic is a state of business conditions when fear and apprehension that preceding conditions of expanding business activity are about to end suddenly and change radically, thus suddenly fostering a spirit of extreme pessimism on the part of business leaders (i.e., entrepreneurs). It often results from previous economic exchange (or asset valuations) occurring without proper regard for underlying values. Panics often occur at or near business cycle peaks. Often, the realization that a downswing was underway was the catalyst.

A panic is usually of short duration, while a crisis is lengthier, as it includes the final stages of the period of expanding activity, as well as the early stages of the period of declining activity. Panics are often marked by an acute shortage of loanable capital, very high interest rates, an inability for many businesses to obtain credit, and often a preponderance of business failures. Panics (and crises) have been associated with recessions in the United States.

In many cases, productive activity peaked before the crisis or panic occurred. In 1929, for example, the recession had already started in August, three months prior to the Great Crash in October. In the Great Financial Crisis (GFC) of 2007-09, production (and other indicators used by the NBER to date cycle turns) peaked in December 2007, nine months before the collapse of Lehman Brothers. In a similar manner, the index of real gross output used in this book peaked in October 2007. In November 2019, real gross output peaked, setting a weak foundation for the Covid-recession, or lockdown recession of 2020, as state and local governments sought to contain the coronavirus pandemic.

A peak is the state of business conditions when activity is extremely high, while a trough is the state of conditions when business activity is abnormally low. These transitions between the alternative periods of expanding and contracting business activity are regarded apart from the conditions into which they lead. Complete movement of business conditions tends to return to a previous status and is regarded as a complete business cycle. For practical purposes in this book, I date cycles from trough to trough, with the peak in between. Classical economist James Stuart Mill (1806-1873) noted that the seeds of each boom are sown in the preceding crisis. This presents a good framework. The following are rough summaries of the characteristics of both stages of the business cycle and are based on over 230 years of American economic history. That is, what typically happens during the cycle.

The following provides some common characteristics of downswings and upswings. The discussion is meant to be descriptive of broad trends and developments within both phases of the business cycle. No two cycles are exactly alike, although all have similar characteristics.

Characteristics of the Downswing – This is a period of contraction beginning with the last month of expansion (i.e., peak of the business cycle) and ending with the trough (or end) of contraction. It was referred to as depression in earlier times and is currently referred to as recession. Marx and other 19th century economists sometimes referred to these as crises or commercial crises. We know that these downswings usually follow periods of rapid increase in output, accompanied by speculation, and expansion of credit.

Downswings are periods of maladjustment between supply and demand for goods, between cost and availability of credit, between productive capability and consumption possibility. This is a period of instability, economic tensions, and slackness. During these times, business activity, after slowing down and peaking, will then decline as forced readjustments painfully take place.

Confidence is fragile, and the business confidence that characterized the preceding period of expanding activity has changed for the worse. When a boom breaks, confidence can collapse. Caution becomes the rule of the day as the excesses of the boom go into reverse. Psychology plays an important role. The seeds of the downswing were sown in the time since the last business cycle trough. That is, during the period of the upswing of recovery and expansion, when imbalances first appeared and gathered strength. This downswing period marks the period of readjustment from those imbalances.

This stage in the business cycle features a widespread contraction in business activity across many industries and economic sectors. The tendency on the part of any industry or sector to curtail activity has a similar impact upon other fields, with the result that as the period (or duration) of decline lengthens, the situation cascades, becoming more pronounced. After over-production in some industries becomes apparent in light of perceived decreased demand or opportunity at prices that are profitable, producers in that line of business cut-back, setting in motion a vicious cycle of curbed production and purchases, reductions in payrolls, falling incomes, and a duller pace of spending. This is the sequence and order of causation. It is a vicious cycle. The reaction does not immediately occur in all industries, but eventually spreads to others.

Industrial production is substantially restricted and falls off during this stage. Buyers are either unwilling or unable to purchase and, as a result, demand declines as well. Unfilled orders shrink, and inventories rise to new levels relative to output. Apprehension of future prices has the natural effect in causing producers to lessen the risk of loss from further weakness in prices. At this point, inventories are more than adequate to meet existing demand, which is increasingly a faction of its former volume. Construction volumes, reflecting prior commitments and plans, however, may increase during the early period of decline. Transportation weakens and falls off. Supply chain congestion eases, and deliveries quicken. If the downturn is worldwide, both exports and imports will be dull. That said, should the downswing be confined to the United States, the tendency would be for American exports to increase and imports to