Vol. IX No. 6

ECONOMICEDUCATIONBULLETINJuly 1969

Published by

AMERICAN INSTITUTEfor

ECONOMIC RESEARCHGreat Barrington, Massachusetts 01230

ECONOMIC TIDES AND TRENDSTHEIR EFFECTS ON YOUR LIFETIME PLANS

by THE EDITORIAL STAFF

ContentsINTRODUCTION: AN ECONOMIC APPRAISAL

OF YOUR LIFETIME 2EARLIER WORKING YEARS 2MIDDLE WORKING YEARS 2LATER WORKING YEARS 3

I. LONG TERM TRENDS 4PRICES 4DEPRECIATION OF THE DOLLAR 5ADJUSTMENT OF LONG-TERM PLANS 6RETIREMENT PLANS 6BUSINESS PLANS 7CONFUSION OF TRENDS 7

II. INTERMEDIATE T R E N D S 8THE CONSTRUCTION CYCLE 8CONSTRUCTION PLANS 9

III. BUSINESS-CYCLE T R E N D S 10CHARACTERISTICS OF BUSINESS CYCLES . . . 10INFLUENCES AFFECTING

BUSINESS-CYCLE TRENDS 12CUMULATIVE NATURE OF

BUSINESS EXPANSIONS 12INFLATING, DEFLATING, AND

THE BUSINESS CYCLE 12PLANNING DURING THE BUSINESS CYCLE . . . 13

IV. TYPICAL BUSINESS GROWTH T R E N D S . . . 16THEORETICAL GROWTH PATTERN 16INDUSTRY GROWTH PATTERNS 16GROWTH OF TOTAL INDUSTRIAL PRODUCTION . 18ADJUSTMENT TO BUSINESS

GROWTH TRENDS . 19Copyright 1969 by American

V. THE TECHNOLOGICAL A D V A N C E 20TYPES OF TECHNOLOGICAL PROGRESS . . . . 20EFFECTS ON YOUR LIFETIME PLANS 21

VI. REGIONAL TRENDS 22POPULATION TRENDS 22

VII. LOCAL ECONOMIC TRENDS 24TRANSPORTATION FACILITIES 24DOMINANT BUSINESS ENTERPRISES 24REAL-ESTATE TRENDS 24POLITICS AND TAXES 24

V I I I . W A R S A N D N A T U R A L C A L A M I T I E S . . . . 2 6WARS 2 6N A T U R A L C A L A M I T I E S 2 7

IX. YOUR ADJUSTMENTS TOECONOMIC TIDES AND TRENDS 29

QUESTIONNAIRE CHECKLIST 29

CHARTS AND TABLESANNUAL GOLD PRODUCTION

AND COMMODITY PRICES . . . 4PURCHASING POWER OF THE

CONSUMER DOLLAR 6RESIDENTIAL CONSTRUCTION 8AMERICAN BUSINESS ACTIVITY SINCE 1790 . . 11OUTPUT vs. TIME IN YEARS . 16TEXTILE CONSUMPTION 17INDUSTRIAL GROWTH TRENDS 17INDUSTRIAL PRODUCTION 18RATE OF GROWTH OF U. S. POPULATION . . . 22HARWOOD INDEX OF INFLATION 27

Institute for Economic Research

INTRODUCTION:AN ECONOMIC APPRAISAL OF YOUR LIFETIME

T ides and trends in the economic affairs of men arelargely beyond the power of any individual toalter or control. Historically, most of these

fluctuations are repeated, some of them several times,during an individual's working lifetime. Therefore, onecan—and should—plan his economic activities to avoid,when possible, the effects of adverse tides and trends andto take advantage of those that are more favorable.

The economic changes that will be considered here willbe better understood if one carefully reviews his probableeconomic lifetime in long-term perspective. Because thestages of mental and physical development, maturity, andsenescence, are similar for us all, albeit not identical, theeconomic lifetimes of most of us follow a similar patternto a much greater degree than is generally realized.

Economic self-sufficiency is first realized for mostpeople sometime during adolescence when, as young menand women, their powers and capacities usually increaseuntil some time in late middle age. At that stage one'seconomic abilities ordinarily begin to decrease until, inlater years, they become almost nonexistent. A moredetailed review of these phases and their significance isthe first step toward understanding the effects ofeconomic tides and trends on one's lifetime plans. Forthis discussion we shall divide man's economic lifetimeinto three phases: the earlier, middle, and later workingyears.

EARLIER WORKING YEARS

To mark the earlier working years, the approximate agespan of 18 to 40 will serve as a general guide. Althoughmany individuals do not become independently active inthe economic world until they have completed theircollege education, or even later, others are economicallyindependent at a much younger age, often as early as 16years. Toward the latter part of this phase, some peoplemay become virtually middle-aged at 35, while othersmay retain the resilience and vigor of youth until age 45.Every good poker player knows that he wins moreconsistently when he avoids taking the long chance; thewise person does not assume that Lady Luck is workingonly tor him. Therefore, any individual looking ahead willbe wise if he assumes that his earlier working years willapproximate the average span indicated above.

Ordinarily one's formal education has been completedbefore his earliest period of participation in economicaffairs. However, in many instances, a formal educationdoes not always provide the key to economic success.Partly for this reason, the earlier working years are a timeof experimentation, primarily to find the work in life thatyields the maximum of economic and esthetic satisfactionto the individual.

Fortunate, and rare, is the young person who knowshis own aptitude and likings well enough to make anearly choice wisely. Most do not know, and aptitude testsoften fail to provide the right answer. Today's youth,especially, is one with an inquisitive nature, one ofprotest, seeking changes, and searching for an individualrelevance for a better society, and so self-analysis andexperimentation is requisite in the absence of satisfactoryscientific bases that will provide them with an answer for

a meaningful and fruitful career.In youth, especially prior to marriage, responsibilities

usually are moderate. This is the time of life when riskscan afford to be assumed. Failure at this phase is notserious because responsibilities to others are small and theresilience of youth can be counted on for the comebackneeded for attainment of eventual success.

Many young people acquire responsibilities during thisperiod, however, either because of marriage or thenecessity of supporting aged parents, or for other reasons.Today these young men and women are fortunate, sincethey are relieved of a large part of their burden ofresponsibilities through special "risk taking agencies." Forexample, insurance can be used to protect dependents atminimum cost by using the relatively well-known terminsurance for several years.* In addition, the expandedrole of the Federal Government through extensive welfareprograms, "Medicare," additional and ever-increasingsocial security benefits, and other legislative actions, hasrelieved the young people of today from many of theburdens and responsibilities they would have had toassume only a few years ago, so that today's youth maytake even greater risks.

The point to be remembered is that maximumresilience exists during one's earlier working years, so thatthe effects of adverse economic tides and trends can morereadily be overcome, and great risks may justifiably beassumed in order to take advantage of favorable tides andtrends.

MIDDLE WORKING YEARS

The period of middle age is especially difficult todelimit, as noted, because both its beginning and end mayvary widely among individuals. For the purposes of thisdiscussion, however, we will use the age period from 40to 55.

For most of us these are years of progress and perhapsof change in our chosen fields of endeavor, when we canbenefit most from moves made in our earlier workingyears. But maximum productivity ordinarily will bereached somewhere near the end of this period, and mostwill find a diminishing return in further moves. The wiseperson will continue his education and training during thisperiod even though he reaches a commanding position inthe economic world, because the time will not be fardistant when he will be more valuable for what he haslearned than for what he can do. In late middle workingyears his earning power will depend to a greater extent onhis knowledge and judgement than on the energy andstrength of youth.

This is the period when the economic harvest should bereaped in order to provide for the later years. Usually,responsibilities are greatest during the middle workingyears. Children require schooling, at ever-increasingexpense; aged parents may become dependents; maximumliving costs incidental to professional or executivestandards are encountered; and that inevitable dependent,one's older self, must be provided for during this period.

During this time, great risks should be avoided

*An Institute publication, Life Insurance and Annuities from theBuyer's Point of View, deals with this subject in detail.

wherever possible and considered only when a preponder-ance of favorable trends may warrant. For the averageperson this is no time to be casting dice with fortune, andtime remaining when a comeback may be staged islimited. Every person has, unfortunately, discovered theresilience of youth goes when youth departs, and onecannot hope to be greatly different from others.

LATER WORKING YEARS

Although exceptions occur, the general rule is thatfurther economic progress is limited during later workingyears of one's life, say from age 55 to 65 or 70, and mostpeople experience a substantial decline in earning powertoward the latter part of this period.

These later years, post-middle-age, comprise thatdifficult time of life when endurance and resilience bothdecline. The probability of impaired health, an economicfactor of considerable importance that should be providedfor, is naturally greater for us all at this phase. Thedifficulties met and adjustments that must be madebecause of unexpected adversity are less easily resolvedduring these later years. In view of these and otherconsiderations, large risks involving possible serious lossesshould be carefully avoided.

Fortunately, however, our responsibilities usually de-crease during these later years. Children have becomeeconomically independent, and chances of having adependent parent at this phase are small. Thus, in the

later working years, most of us are gradually relieved ofthe necessity of caring for others and can devote moreattention to conserving assets for our own retirement.

The question most must face sooner or later is: Whento retire? Without wise forethought and planning,retirement may be postponed beyond the most desirabletime. Unless one has an understanding of possible adverseeconomic trends and the ensuing effects that may resultin a partial loss of assets accumulated, the period ofretirement may be cut short. Retirement does notguarantee survival, and the economic struggle must becontinued. The wise person thus will always guard hiseconomic welfare against adverse tides and trends.

With the foregoing thoughts in mind concerning thenormal economic lifetime, we can now turn to a study ofthe economic tides and trends that probably will beexperienced by most of us. First we will consider the verylong-term trends during the past century, including the25- to 30-year cycles of gold production and prices andthe prolonged depreciation of the dollar. Second, the 16-to 20-year construction cycles will be discussed. Third,the so-called business cycles—of much shorter duration-will be dealt with. Other important subjects will include:the technological advance; population changes and effectsof regional trends; local and national economic trends;and the impact of wars and other natural calamities. Afinal discussion will emphasize the more importantpersonal adjustments that can be made to these tides andtrends.

I.

LONG-TERM TRENDS

M any economic trends change within the averagelifetime. Some of these changes are so importantfrom the average individual's viewpoint that they

will be considered here. We have made the significantassumption, without making predictions, that economicchanges in the future will be similar to those of the past,not in every detail, but in general. Readers are cautioned,however, that major alterations in the institutionalframework of our economy, if they occur, might alterpatterns of changes in the future.* For convenience, wehave divided these trends into three groups, as follows:

1. Long-term trends, ordinarily lasting a quarter of acentury or more.

2. Intermediate trends that ordinarily last from 8 to25 years.

3. Business cycles, ordinarily lasting 1 to about 9years. In this chapter, the first of these three groups willbe discussed.

PRICES

The trend of prices is available for a long enoughperiod to justify discussion of them. Relatively accuraterecords of commodity prices are available for more than100 years.

The general level of prices reflects the relationship

*For example, a return to the gold coin standard, if and when itoccurs, may have a marked effect on the duration and magnitudeof business-cycle changes. A gold coin standard in an institutionalframework of sound commercial banking probably would greatlyreduce the duration and amplitude of business-cycle changes.

ANNUAL WORLDMILLIONS OF FINE OUNCES5040

between the supply of things offered in the markets andthe demand for them (desire plus purchasing media).Prices of specific things may fluctuate, but suchfluctuations do not alter the general level of prices; thislevel is altered greatly only by a substantial change in therelationship between the volume of things offered andamount of purchasing media in use.

THE RELATIONSHIP AMONG GOLDPRODUCTION, PURCHASING MEDIA, AND PRICES

Like all other metals, gold is obtained by extractionfrom ore containing it. In relatively free economies,mining of gold (and any other processing activity)continues only as long as operations prove profitable.When the general level of prices is high, the cost of wages,equipment, transportation, and materials needed formining of gold is high; conversely, when prices are low,mining and production costs are low. Because a givenamount of gold (by statutory definition of the dollar) is afixed number of dollars, gold mining operations arediscouraged by high costs and encouraged by relativelylow costs.

With the exception of gold that is used commerciallyand hoarded privately, newly mined gold ordinarily istaken to the mints of the world and used as a basis forcreating purchasing media. These purchasing media maybe in the form of gold coins, certificates representingthose coins, paper currency, or checking accounts.

The new purchasing media placed in circulation as aresult of newly acquired monetary gold make possible an

GOLD PRODUCTION MILLIONS OF FINE OUNCES5040

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increased demand for goods that tends to raise prices.Accumulation of monetary gold in the banking systems ofthe world increases bank reserves and makes possible thecreation of additional purchasing media (usually in theform of individual checking accounts). If additionalpurchasing media are created that do not represent thingsoffered in the markets, prices tend to rise. This process,which we have named inflating, will be described later.

From the foregoing discussion the reader will realizethat a triangular relationship exists between goldproduction, total purchasing media in circulation, and thegeneral level of prices. If prices rise, gold production isdiscouraged, thereby curtailing new increments of pur-chasing media. If production of goods in general isincreasing, curtailment of additions to the purchasingmedia available results in relatively smaller demand arid,consequently, lower prices. Lower prices will encouragegold production, however, which in turn will increase thetotal purchasing media available, thereby making higherprices possible once again. The influence of the threefactors on each other tends to equalize the rewardsobtained by the application of human effort toproduction of the numerous commodities, including gold,produced by our economic society.

THE EFFECT OF INCREASED GOLD PRODUCTIONON PRICES

Changes in the general level of prices have resultedfrom changes in gold production. For example, goldproduction increased markedly during the early 1850'sfollowing discoveries in California and Australia. When thebanking systems of the world purchased much of thisnewly mined gold, they created and placed in useadditional purchasing media. The increased demand forother commodities resulted in an increase in the generallevel of commodity prices, as shown in the chart on page4. (The index of commodity prices for the years prior toWorld War I in 1914 is based on commodity prices inGreat Britain, which were more representative of worldcommodity prices; the index for subsequent years reflectscommodity prices in the United States.)

The effect of changes in gold production on the generalprice level has been relatively small during recent years,however, because additions of newly mined gold havebeen small in relation to the total amount of monetarygold. (The unprecedented production of more than 7million ounces of gold in the United States and Australiaduring 1853 was only 4 percent of the total available atthe end of 1850.) Moreover, this effect has been limitedby the triangular relationship among gold production,purchasing media, and prices described above.

THE EFFECTS OF INFLATING AND DEFLATINGON PRICES

Marked inflating and deflating have affected the generallevel of prices to a far greater extent than have changes ingold production during the past century. Inflating is thecreating of purchasing media in excess of the amountneeded for representing the gold-exchange value of thingsoffered in the markets; deflating is the removal of theseexcess purchasing media from use.

The marked inflating that occurred during World War Iresulted in the rapid increase in commodity prices shownin the accompanying chart. Federal Reserve authoritiessubsequently forced deflating in 1920 and 1921, andcommodity prices decreased noticeably during those

years. Involuntary deflating during the first few years ofthe Great Depression resulted in a substantial decrease incommodity prices during the early 1930's.

The unprecedented inflating during and after WorldWar II resulted in another rapid increase in commodityprices, particularly after price controls were abandoned atthe end of the war. Because substantial deflating did notoccur after World War II, commodity prices did notdecrease as they had after World War I.

The adverse effect on gold production of the inflatingduring the two World Wars is also reflected in the cJ; irt.The relatively high level of commodity prices since WorldWar II has restricted gold production to less than thelong-term trend apparent prior to the great inflating ofthe past quarter century.

The chart shows that commodity prices have been farabove the long-term trend for nearly a quarter of acentury. In this situation, the possibility of markedinvoluntary deflating resulting in a substantial decrease incommodity prices (such as occurred during the GreatDepression) should not be ignored. If such a developmentbegan, however, U.S. monetary authorities presumablywould attempt to stop it by further inflating or bydevaluing the dollar.

A dollar devaluation has become increasingly probableduring recent years, as the purchasing power of the dollarand most other currencies has continued to depreciate.Devaluation of the dollar by an appropriate amountwould restore a stable exchange relationship between goldand other things. This stable relationship could bemaintained, provided that the additional purchasing mediacreated for representing the increase in the nominal valueof existing monetary gold and for representing newly-acquired gold repL·ced, and did not augment, some of theinflationary purchasing media now in circulation, andprovided that the remaining inflationary purchasing mediawere gradually removed from circulation.

Monetary and other officials of the United States,however, have given little indication that they understandhow to restore a stable exchange relationship betweengold and other things or how such a relationship could bemaintained. Therefore, action that they may undertakeaffecting this relationship, and the future trend of prices,cannot be predicted.

DEPRECIATION OF THE DOLLAR

Another long-term trend that is related to the trend ofprices during the past several decades is the long-termdepreciation of the dollar. This trend first became clearduring World War I, when marked inflating wasundertaken to help finance war expenditures. The1920-21 depression was the aftermath of this mismanage-ment, and depreciation of the dollar was reversedtemporarily during this period. Then, from 1922 to 1929the quasi-governmental Federal Reserve Board tried itshand at planning and control by expansion of bankcredit. This facilitated inflating that made possibleextensive speculation in real estate and securities. TheGreat Depression was the aftermath of this experiment,and depreciation of the dollar was again reversed duringthe early 1930's. Such depreciation was resumed afterdevaluation of the dollar in 1934, when the deficitspending experiment resulted in large scale inflatingduring the mid-1930¾.

The large-scale inflating during and after World War IIresulted in continuing rapid depreciation of the dollar.The rate of such depreciation diminished during the early

1950 's and 1960 's but accelerated in 1956 and again in1965. In mid-1969 the purchasing power of the consumerdollar was only about 38 percent of what it had been in1940. The trend of depreciation of the dollar is shown inthe accompanying chart.

MONETARY MISMANAGEMENT

As a result of a series of official decisions in the UnitedStates, a dollar has been transformed in only a fewdecades from a specific amount of gold (1/35th of anounce of pure gold in an alloy nine-tenths fine) into apiece of paper. For all practical purposes, the monetaryunit of the United States now is a piece of paper called adollar, the exchange value of which depends solely on thewisdom of Government and monetary officials. Suchvalue now is, in effect, determined by Governmentdecree.

Since the proclamation of President Roosevelt in 1934,which reduced the gold weight of the dollar, the UnitedStates has had an irredeemable currency. Since thencitizens have been deprived of their right to redeemcurrency for gold, and the Government has been free todepreciate, without limit, the exchange value of themonetary unit and the exchange value of all insurance,pensions, annuities, corporate surpluses, church and otherendowment funds, and other forms of savings.

Monetary units of most other countries of the worldalso have been depreciated by a greater or lesser extentduring recent decades. Twice within the lives of manyGermans, the exchange value of the mark has been wipedout. In 1948 the exchange values of currencies of severalother nations were only a fraction of what they had beenseveral decades earlier. These developments were inmarked contrast to the "Golden Age" of sound currenciesduring nearly a century prior to World War I, when theexchange values of major currencies were relatively stable.

Prolonged monetary mismanagement in Great Britain

PURCHASING POWER OF THECONSUMER DOLLAR

201940 1950 1960 1970 1980 1990

culminated late In 1967 in the second devaluation of theBritish pound since World War II, which soon wasfollowed by devaluation of currencies in about 20 othernations. More recently, the French franc was devalued inAugust 1969 for the eighth time in 25 years. Moreover,repeated international monetary crises since the mostrecent devaluation of the pound have increased thepossibility of a widespread realignment of currencyexchange rates together with an increase in the "price" ofgold in terms of all currencies (multilateral devaluation ofcurrencies).

ADJUSTMENT OF LONG-TERM PLANS

The trends that we havd discussed thus far are ofimportance in relation to long-term business and personalplans. Examples of such plans and their relation to thesetrends are given in the following paragraphs.

For many individuals, the purchase of a home will beone of the few major economic transactions undertakenduring their lifetime. We have seen that often many yearsmay elapse between peaks and troughs of long-termtrends. Thus, the man who needs a home at a given timemay not wish to wait until the long-term trend appears tobe favorable for such a purchase. Nevertheless, theknowledge that such trends have occurred in the past andprobably will occur in the future may be helpful to theprospective home buyer.

Nearly everyone who first purchases a home mustanswer at least two important questions. First, how largea burden of debt can safely be incurred in the form of amortgage on the new home? Second, how large a houseshould be obtained in order to provide adequate shelterfor his family? The person who has the long-term trendsthat we have described in mind will have a better chanceof finding wise answers to both of these questions thanwill those who ignore the trends.

Thus, the person who purchases a large house having allthe room desired when prices are at or near the peaks willincur a large debt in the form of a first mortgage on theproperty and will assume a burden that might becomegreater as the years go by. If the long-term trend of pricesturns downward, such a person's business may becomeless profitable, his income may fail to increase as he hadhoped, and he may discover the debt's burden after adecade or two is beyond his means to carry. This personwould have been far better off if consideration of futurepossibilities as reflected by the long-term trends hadtempered his initial purchase.

During the prolonged depreciation of the dollar ofrecent decades, the burden of mortgage debt hasdecreased as repayments have been made with dollars ofdecreasing purchasing power. However, the wise prospec-tive home buyer will not count on indefinite continuationof this trend. He will be aware of the possibility ofmarked involuntary deflating and a decrease in prices thatwould involve repayment of the mortgage debt withdollars of increasing purchasing power.

RETIREMENT PLANS

In planning one's retirement program, consideration ofthese long-term price trends can also be helpful. A personwho retires from active business at a time when pricesgenerally are near the low point of a long-term downwardtrend should not assume that his retirement income thatis adequate for his needs at that particular time will stillmeet his requirements on an equal basis a few years or a

decade later.The long-term trend of dollar depreciation is especially

important to consider in making retirement plans. Aretirement income, such as a pension, annuity, or incomefrom bonds, is fixed in dollar amount and will lose muchof its buying power if the dollar continues to depreciate.A wise investor who foresees this possibility, or one whoplans to retire when prices generally are low, will selectsome investments that may provide him with an increasedincome as prices rise.

BUSINESS PLANS

Inventories of raw materials and manufactured goodsnormally are turned over several times a year by mostmanufacturing industries and other businesses. Long-termtrends are unimportant in respect to this short-termactivity itself, but not to the businessman consideringother aspects of his operations that may require largeamounts of capital goods (plant and equipment). Theseitems have a relatively long economic life, and the cost ofreplacing them is affected by long-term economic trends.A knowledge of such trends can be most helpful inplanning or financing major capital expenditures.

To illustrate: construction of excess capacity during theyears when prices are near the peak of a long-term trendwould be most unwise. Depreciation charges for manyyears to come will be based on the high costs involved forconstruction at such a time. This fact may create aserious competitive disadvantage for the business con-cerned, since competitors may be able to lower their costsby wiser management of their affairs.

When arranging financing of capital expenditures,consideration of long-term trends is important. Manybusinesses issue long-term bonds for such purposes orborrow directly from banks and insurance companies on

mortgages having distant maturities. By reserving the rightto refinance such borrowings (through calling of bonds orprepayment of a mortgage, for example), advantage canbe taken of subsequent changes in interest rates whichhave, to some extent, paralleled the long-term changes incommodity prices. In any event, the maturity of suchloans should preferably be sufficiently distant so that atleast one favorable opportunity to reduce or retire thedebt will intervene. Any businessman who issues bonds orborrows against a mortgage without considering thesefactors may find the maturity date at hand when valuesare low, business is depressed, and the lender is unwillingto place as high a value on the property for lendingpurposes.

CONFUSION OF TRENDS

If the long-term trends that we have discussed thus farwere the only economic trends that should be consideredin our affairs, the situation would be difficult enough.Depreciation of the dollar, in particular, is an especiallyconfusing long-term trend because the process has been anintermittent one, and no well-defined, uniform rate ofchange can be expected to continue. Political develop-ments that can change day by day, often at the stroke ofa pen, provide the most important single clue to thiserratic trend.

As individuals attempt to analyze the existing situationfrom time to time, they will find the picture obscuredsomewhat by other economic tides and trends that alsohave an important influence on their lives. Identificationand discussion of these principal trends, and the desirableadjustments of plans in one's economic lifetime inaccordance with their effects, are the subjects of the nexttwo chapters.

II.

INTERMEDIATE TRENDS

To carry out successfully a forecasting and planningprogram, the principal types of economic cycles orfluctuations must be understood. In addition to

the long-term trends previously described, fluctuations ofan intermediate duration of from 8 to 25 years occur.The economic activity that has been characterizedconsistently by trends of such intermediate duration isconstruction or building activity.

THE CONSTRUCTION CYCLE

The construction industry comprises many small firmsand even more contractors. One of the most importantcharacteristics of the industry is that its end product isvery durable and may last 40 years or longer. Within theindustry, cycles occur in various types of construction aswell. In addition to the cycle of aggregate buildingactivity, cycles are found in residential, nonresidential,and in alterations activity. The immobility of buildingsalso plays a role; as population shifts new buildings areconstructed to house people in the new locations.Patterns of production and income shift and result inchanges in demand for some kinds of buildings that arenew in style and for those kinds of buildings nowstanding. However, cycles of aggregate constructionusually affect all major sectors of the constructionindustry and average between 15 and 25 years induration.*

Cyclical fluctuations in building activity are usually twoor three times longer than those in general businessactivity and are of greater magnitude than almost anyother component of business activity. Major cycles inbuilding and in general business activity appear to beassociated during peacetime, but minor cycles are notparallel.

Late in the 1860's and early 1870's, building reached apeak. In 1873 a serious building depression began, andthe next peak was not reached until the mid-1880's.Construction activity turned down in the early 1890 'sbefore the depression (sometimes referred to as the Panic)of 1893. The peak for the next cycle was in 1916, and

*Moses Abramovitz, Evidences of Long Swings in AggregateConstruction Since the Civil War, Occasional Paper No. 90,National Bureau of Economic Research, Incorporated, New York:l%4.

construction turned downward in 1917-18 when theUnited States was engaged in World War I. Indications arethat construction would not have peaked until severalyears later except for that war. The cycle begun at theend of the war was interrupted briefly during the 1920-21depression, but moved upward to a peak in 1925 andthen declined markedly after 1928. Construction activityreached a trough during 1933 and subsequently expandeduntil the beginning of World War II.

Much residential building was suspended during the yearsof the second World War but was resumed soon after its endin 1945. Within a year, residential construction hadincreased more than tenfold (see chart, this page). Suchconstruction increased substantially during 1949 and early1950 but reached a peak in the latter year. After decreasingduring the early part of the Korean War, residentialconstruction increased irregularly until the early 1960's.The chart shows that the physical volume of such construc-tion at mid-1969 was only about three-quarters of that atthe peak more than 5 years earlier, and such volume,approximated that 15 years earlier.

Many explanations have been offered for the intermedi-ate cycles of construction activity, including politicalupheavals, population changes, fluctuations in mortgageforeclosures and marriage rates, immigration movements,changes in "headship rates" (the proportions of heads ofhouseholds in each age class), interest rates, and theinfluences of war. The cycles in residential constructionprior to the 1930's have been attributed to the waves ofimmigration by one researcher.† The National Bureau ofEconomic Research offered a "partial hypothesis" to theeffect that accidental factors are important influences inintermediate cycles. An upward movement in the cyclemay be initiated by "a single accidental cause operating inthe same direction over a number of years, or bynumerous independent accidents cumulating in the samedirection over a number of years." The National Bureau'sstudies suggest that a downward trend is "likely to beprolonged by [such] random factors."** The effect of

†Campbell, Burnham 0., Population Change and Building Cycles,llrbana, Illinois: Bureau of Economic and Business Research ofthe University of Illinois, 1966.**A. F. Burns, Production Trends in the United States Since1870, National Bureau of Economic Research, Incorporated, NewYork: 1934.

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war on building activity has been noted above. War alsoinfluences other changes, such as movement of popula-tion, marriage rates, and birth rates.

In view of the experience of the past century, theabsence of a marked decrease in residential constructionsince the apparent peak in 1964 is exceptional. Aninfluential factor supporting such construction probablyhas been the artificial stimuli provided by the FederalGovernment in the form of insured mortgages and housinglegislation. The accelerated inflating that began in the mid-1960's also has stimulated construction of all types.

This inflating was interrupted briefly in 1966 byadoption of a less expansionary monetary policy. Thispolicy resulted in a diversion of funds for use in mortgagelending, with the result that residential constructiondecreased markedly during that year. The less expansion-ary monetary policy adopted late in 1968 apparently

began to affect residential construction during the springof 1969. Continuation of this policy throughout 1969probably would result in further decreases in residentialconstruction.

CONSTRUCTION PLANS

During an average lifetime, one apparently can expectperhaps three but not more than four exceptionalopportunities to invest in new construction. Because costsfor both residential and industrial construction arerelatively large compared to other expenditures fordurable goods (such as automobiles, plant equipment,etc.), careful study and consideration should be given totrends of construction activity. To the extent practicable,major construction projects should be undertaken onlyduring the contraction phase of the construction cycle.

III.

BUSINESS-CYCLE TRENDS

B usiness cycles are characteristic of relatively shorteconomic fluctuations lasting from 1 to 8 or 9years. Such cycles may be described as recurrent

fluctuations in business activity that involve upwardtrends culminating in periods of prosperity followed bydownward trends of aggregate business activity culmina-ting in periods of recession or depression. These trendsare recurrent, but not periodic.

Most readers probably are familiar with the graphicmethod of indicating levels of activity in variousindividual businesses, industries, or other segments of theeconomy. Charts are used to record various economicactivities, such as the number of automobiles produced,the movements of prices, the number of employed andunemployed, etc. Such visual records illustrate fluctua-tions that are found in all business cycles.

The chart "American Business Activity Since 1790",which was prepared and published by The Cleveland TrustCompany and is reproduced on page 11, represents acomposite picture of business-cycle changes.* A strikingfeature of the chart is the wide range over which thecourse of American business activity has varied. The chartreflects various kinds of economic activity adjusted forlong-term trend, including industrial production from1919. We emphasize, however, that business-cycle changesinvolve changes in a broad range of economic activitiesthat cannot be portrayed accurately in one chart. Forexample, a statistical series of industrial production or ofemployment will not provide a comprehensive picture ofgeneral business activity; such a series is merelyrepresentative of business activity.

In order to analyze the timing of business-cyclechanges, attempts have been made (principally by theNational Bureau of Economic Research) to ascertain asaccurately as possible the approximate dates when

regate business activity began to decrease or increase.†lese reference dates indicate the approximate peaks and

troughs of the downward or upward fluctuations thatconstitute the business cycles. The peaks and troughsindicated by the approximate dates, then, presumably arethe nearest approximations to the peaks and troughs ofthe business cycles calculated so far. An individual serieswhose peaks and troughs closely approximate those ofgeneral business activity is industrial production. A chartof such production, adjusted for seasonal variation, isshown on page 18.

CHARACTERISTICS OF BUSINESS CYCLES

Changes in specific economic processes vary in bothtiming and magnitude from those of business cycles,which represent the aggregate of such changes. Neverthe-less, for individuals forced to adjust to business-cyclechanges, information about specific economic activities,such as prices, employment, production, inventories,

*Copies of chart, 1969 edition, with explanatory footnotes areavailable free from The Cleveland Trust Company, Cleveland, Ohio44101.†A. F. Burns and W. C. Mitchell, Measuring Business Cycles, NewYork: 1946 and Geoffrey H. Moore, Business Cycle Indicators,New York: 1961, both published by National Bureau ofEconomic Research, Incorporated.

personal income, sales, etc. may be helpful.

TRENDS OF PRICES

Price changes have varying characteristics during thebusiness cycle. Major groups of prices, such as stockprices, wholesale commodity prices, and retail prices allhave fluctuated differently. For example, stock pricesusually have begun to decrease some months before thepeak of a business cycle; the trends of industrialcommodities prices usually have coincided approximatelywith business-cycle trends; and retail prices usually havenot stopped increasing until a few months after thecyclical peak of general business activity has beenreached.

Within the major groups, prices of certain commoditiesor types of services historically have fluctuated different-ly. Increases of industrial stock prices have alwayspreceded the upward turn of business activity in recentdecades. On the other hand, increases of railroad stockprices sometimes have followed the revival. Within thegroup of wholesale commodity prices, prices of hides andleather usually have begun to increase months beforegeneral business activity increased, whereas prices ofmetals and metal products usually have not begun toincrease until 3 months after the cyclical trough has beenreached. Indexes of retail prices of fuel and lightingusually have not begun to rise until 2 months after retailprices in general have turned upward.

TRENDS OF PRODUCTION

Production of durable goods fluctuates much morewidely than production of nondurable goods duringbusiness cycles. Durable goods, such as automobiles, havebeen produced in far greater quantities during periods ofprosperity than during recessions. For example, onlyabout 5.6 million passenger cars were produced during therecession year of 1954, nearly 8 million were producedduring 1955. Production of nondurable goods, however,such as leather and leather products, manufactured foods,textiles, etc., has not involved such wide variations.

The situation with respect to output of producer'sgoods versus those intended for consumers is similar.Production of producer's durable goods (machine tools,presses, dies, etc.) varies to a greater extent during thebusiness cycle than production of consumer's durablegoods (stoves, refrigerators, furniture, etc.). Moreover,among the two major categories of nondurable goods,output of producers' nondurable goods (leather, textiles,fuel, etc. used in manufacturing processes) varies morethan output of consumers' nondurable goods (finishedgarments, manufactured foods, etc.).

TRENDS OF INVENTORIES

The tendency for subordinate elements of principaleconomic activities to follow different trends duringbusiness cycles is also characteristic of changes in thedifferent types of business inventories. Increases in thephysical volume of inventories ordinarily have notoccurred until about 6 months after business-cycle

10

PRICE BUSSCALE SCAL

AMERICAN BUSINESS ACTIVITY SINCE 1790

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Copyright 1970 The Cleveland Trust Company

11

troughs. However, goods in the process of manufactureand supplies of finished goods made to order haveincreased and decreased at about the same times thatgeneral business activity has. Inventories of raw materialssupplied by domestic manufacturers or dealers have begunto accumulate 2 to 3 months after business activity beganto expand, whereas raw materials obtained from distantsources or purchased on long-term contract have notincreased until several months after business-cycle troughs.Inventories of staple finished goods have varied inverselywith business activity during the shorter cyclical phasesbut have lagged business activity by many months duringprolonged cyclical changes. Cyclical changes in inventoriesof wholesalers and retailers have tended to lag cyclicalchanges of business activity. Apparently, retailers havebeen unable to predict future sales trends early enough inorder to revise their purchases of goods accordingly.

TRENDS OF BUSINESS FAILURE LIABILITIES

The trends of business failure liabilities also has beenpeculiarly related to changes in the business cycle.Business failure liabilities usually have decreased whenbusiness in general expanded and have increased whenbusiness contracted, but not coincidentally. The averagelead of inverted business failure liabilities before business-cycle troughs has been 8 months. In other words, suchliabilities usually have begun to decrease 8 months beforeaggregate business activity increases. The average lead ofthe inverted series before business-cycle peaks has beennearly 11 months.

INFLUENCES AFFECTINGBUSINESS-CYCLE TRENDS

Many various developments affect business activity inmany ways. For example, fluctuations in steel outputmay result from fluctuations in automobile production orfrom the advent of a war. The amount of coal mined maybe large if iron foundries are operating at capacity orsmall if floods make mining impossible. The causes ofcyclical variations in business may be divided into twogeneral classes: those influences that occur outside andinside a nation's system of economic activities. Theformer include war or threat of war, trends of businessactivities abroad, and phenomena of nature (aside fromseasonal variations) such as floods, earthquakes, blizzards;changes in legal rules pertaining to methods of conductingbusiness, such as new tax laws, changes in bankingsystems, and labor legislation; and extraordinary Govern-ment spending.

Influences that occur within the economic system arevirtually infinite. Increased production is accompanied byincreased employment; increased employment is accom-panied by increased purchasing power; the resultingincreased demand may induce manufacturers to increaseproduction, which brings even greater employment, andso on. These general influences reflect the interrelation-ships that prevail in the economic system.

Interrelationships exist among industries as well asamong individual enterprises. For example, the auto-mobile industry depends on the steel industry forsupplies; the steel industry and the automobile industryboth depend on the railroad industry for transportation;the railroad industry depends on the coal and petroleumindustry for fuel and on the steel industry for equipmentand tracks; the petroleum and coal industries depend onthe steel industry for drills, rigs, and so on. Increasing and

decreasing activity among an enterprise's customers,competitors, and suppliers affect it. Financial relationshipsinvolving creditors and debtors make one enterprisedependent on another, either directly or through thebanking system. Moreover, every enterprise must buy andsell in a common market so that a sale or a purchase ofanything, anywhere, may affect many firms in one way oranother.

CUMULATIVE NATUREOF BUSINESS EXPANSIONS

Changes in business activity tend to become cumula-tive, especially when excess purchasing media are createdand placed in use. An increase in credit extended mayprovide purchasing media in excess of those needed forrepresenting things offered in the markets. The resultinggreater demand for things offered will tend to increaseprices, and rising prices will encourage greater production.

When prices are rising as the result of creating excesspurchasing media, excess or speculative inventories maybe accumulated by businessmen in anticipation of futureneeds or higher prices. If more excess purchasing mediaare created and loaned to business for accumulatingexcess inventories, prices will tend to increase further.This development may lead businessmen to accumulateeven more excess inventories. The process thus canbecome cumulative.

A parallel situation occurs when security prices beginto rise as a result of creating excess purchasing media.Speculators may buy stocks in anticipation of furtherprice increases, and stock prices will increase further. Ifthe banking system creates more excess purchasing mediaand loans them to borrowers for buying stocks, theprocess will become cumulative, as it did during the late1920's. Speculation of any kind, whether in inventories,stocks, land, or commodities, can be prolonged only bythe continued creation of excess purchasing media.

INFLATING, DEFLATING,AND THE BUSINESS CYCLE

When all the purchasing media in circulation representeither gold or other things offered in the markets, ageneral balance exists between the effective demand forand supply of things. The primary mechanism for creatingand placing in use purchasing media representing thingsoffered in the markets is the commercial lending processof the banking system.

For the purpose of this discussion we shall assume abalanced condition wherein the flow of new purchasingmedia created by the banking system (largely in the formof credits to checking accounts of businesses) parallels inamount and timing the corresponding flow of things tothe markets.

At various times in the history of the United States,particularly but not only during periods of war,purchasing media in excess of the amount needed for abalanced condition have been placed in circulation. Theaddition of such excess purchasing media to that alreadyin circulation is the process that we have named"inflating." This process involves a departure from thebalanced condition described above.

Inflating makes available to individuals and businessfirms excess purchasing media that ordinarily are used tobuy things of one kind or another. When inflating occurs,the excess purchasing media are used by buyers to bid upprices in general (always relatively to the long-term trend

12

and sometimes absolutely as well). Usualty the resultingrise in prices is especially marked in some particular classof articles, although its effects spread to all. Thus, in1919 the principal speculative medium was wholesalecommodities; in 1928-29 the stock market was thefavorite; more recently, prices of virtually everything,including wages of workers in many industries, haveincreased markedly.

Some of the excess purchasing media (either in theform of checking accounts or paper currency) remain inthe principal field of speculation, rapidly changing fromhand to hand as speculators successively buy and sell,bidding up prices to even higher levels. Much of theexcess, however, is used in channels of trade. Successfulspeculators buy new houses, automobiles, and otherluxuries. Many businessmen, deceived by artificiallystimulated demand, use the excess purchasing media toenlarge plant facilities. Organized labor unions find thatthey can demand and obtain higher wages frombusinessmen who are receiving the windfall profits. Publicagencies are encouraged to enlarge expenditures as a resultof increased tax receipts and prospects of easy borrowing.Much new construction, together with the artificiallyenlarged demand for current production, is reflected inthe statistics of trade during periods of boom andprosperity.

Sometimes the excess purchasing media have beenoriginated by the commercial banks by discounting notesof private borrowers and crediting their checking accountswith the proceeds. At other times, the banks havepurchased Government bonds and paid for them bymaking bookkeeping credits to the Treasury's checkingaccounts. Rising prices that at first may appear in only alimited field invite speculation for a further rise, whichinvolves further borrowing. Finally, the boom is fullydeveloped and sustained largely on the basis of pyramidedextensions of credit.

This situation is clearly vulnerable. A serious financialdisaster, such as failure of a large bank or businesscorporation, often has been sufficient in the past to"prick the bubble" and initiate a reversal of the process.If something of this kind does not occur, the boom maycontinue until the legal limitations of banking reserveshave been reached, or until rising costs of productionforce businessmen to curtail operations, or until thepurchasing media become worthless. Any of thesedevelopments will bring the speculative spree to an end.

Following the speculative period, the inflationarypurchasing media that were created and placed incirculation are withdrawn, i.e., the inflating process isreversed. Withdrawal of excess purchasing media fromcirculation is the process that we call "deflating."Deflating involves a reversal toward restoration of thebalanced condition that was departed from as a result ofinflating.

During the deflating phase of the cycle, a constantdrain of funds from the stream of money incomes occurs.The banking system withdraws purchasing media fromcirculation by selling securities in the open market and bycalling loans or refusing to renew loans to marginallyprofitable or unprofitable businesses. In the period ofprosperity, prices of things are increased as inflatingincreases effective demand. Consequently, when thedeflating begins, things on the way to the marketplace arepriced at the prosperity (inflationary) levels. Because ofthe retirement of purchasing media from circulation bythe banks to liquidate past excesses, things coming to themarket meet relatively insufficient demand, inventories

accumulate, and prices must be reduced. Merchants andmanufacturers, therefore, will experience losses, and theyattempt to curtail production and cut costs. But as longas the liquidating process still is incomplete, the mostdramatic reductions in wages and other elements of costswill provide only temporary advantages to the merchantsand manufacturers. Although things may be offered in themarkets at lower prices, part of the flow of moneyincomes is still being used to "pay the piper."Consequently, the available purchasing media still areinsufficient for buying all things offered in the markets,even at reduced prices.

Deflating may or may not continue until all of theexcess purchasing media have been eliminated. If thedeflating is partial rather than complete, then someinflationary purchasing media will remain in circulation,and a balanced condition will not be restored. On theother hand, if the deflating is fairly complete, no furtherdrains are made on money incomes to repay old loans ofan inflationary nature; the balance between purchasingmedia in use and things offered in the markets will berestored; and the recovery phase of the business cycle willproceed from that time.

We should emphasize that business-cycle fluctuationsmay not be solely or even primarily attributable to theprocesses of inflating and deflating. However, inflating hasprolonged expansions of business activity and hasfacilitated extremes of boom and depression. In theabsence of inflating and deflating, the magnitudes ofbusiness-cycle fluctuations, particularly those during andafter World War I and during the Great Depression,presumably would not have been so great.

PLANNING DURING THE BUSINESS CYCLE

The so-called "life-expectancy" of an individual borntoday is approximately 68 years. A period of increasingbusiness activity, including the most recent one, has neverlasted longer than 9 years. A period of decreasing businessactivity has never lasted longer than 5 years. Themaximum length of any one complete cycle has neverexceeded 10 years. On the basis of the average length of acomplete cycle in the past, anyone living until 68 years ofage can expect to experience about 13 complete cycles.

The business cycle reflects changes in many economicactivities. The specific cycle of any individual business oraspect of economic activity may have fluctuations ofgreater or lesser magnitude than those of the businesscycle÷ However, the interrelationships that exist withinthe present economic system virtually insure that everybusiness will be affected in some way by the generalcyclical movements. Moreover, in almost all instances theeffects of the business cycle are important factors to beconsidered in formulating plans or in undertaking anyspecific action. Not until a clear picture of the st^¿e ofthe business cycle has been obtained can an individualwisely plan his economic activity at any time.

Individuals should disregard the notion propoundedduring recent years by some academic theorists that thebusiness cycle is a thing of the past. During periods ofprosperity many individuals forget that boom prosperityis a temporary phase of business activity. Whenemployment and production are near the maximumpossible with existing personnel and facilities, ~nd whenprices are rising or are high, men in all walks of lifebecome imbued with the optimism so generally shared.Many readers may not be familiar with the "new era"philosophy that preceeded the 1929 stock market

13

"crash." This "new era" type of thinking prevails to agreater or lesser extent in every major cyclical expansionof business activity. For example, at mid-1969 manybusinesses still planned to continue large additionalspending for expansion of plant and equipment in spite ofwarnings by Government authorities that they would notcontinue to augment demand, by further inflating.

BUSINESS PLANS

We have previously described some of the interrelation-ships that exist among most industries and businesses.Since business plans are directly affected by the businesscycle, we shall point out how businessmen can coordinatecertain specific actions advantageously with business-cyclechanges.

Producers' durable goods should be purchased duringthe contraction or recession phase of the business cycle.Their economic lifetime corresponds more nearly toperiods involving one or two business cycles than to thelonger-term trends described earlier. During the recessionphase, however, the general level of prices usuallydecreases to less than that during the precedingprosperity. Therefore, available depreciation fundsordinarily can be used during a recession to purchasemore equipment than could be purchased for tne samedollar amount during the preceding or subsequent boom.

During a period of increasing prosperity, the mosteffective use of plant, equipment, and labor may bereached well before the peak of the business cycle.Although total production may be increased by returningto use existing plant that had become obsolescent and byusing marginally efficient labor, profits will not increaseproportionately. Moreover, a point may ultimately bereached where the plant and equipment may be soobsolete and additional labor so ineffective that frequentbreakdowns and disruption of normal procedures reducetotal production. Attempts to increase production indis-criminately during periods of increasing business activitymay curtail substantially the ratio of profits to income.

During the latter stages of a boom, inventories shouldbe reduced to the minimum compatible with profitableoperations of a business. Industries and companies havinglarge inventories at the peak of an inflationary boomperiod are vulnerable to substantial losses. Raw materialsinventories usually have been accumulated at high prices,and the value of inventories of goods-in-process and offinished goods is based on the high costs prevailing duringthe peak of the boom. The decrease in demand when thedownturn occurs is quickly reflected in lower prices.Continuation of the decrease in business activity thatfollows further lowers prices, with the result that, duringperiods of recession, manufacturers may be forced toliquidate excessive inventories at prices far below theiroriginal cost.

Excessive borrowing by means of commercial bankterm loans (of more than 1 year's maturity) also shouldbe avoided during a boom; such loans may be repayableduring the recession phase of the business cycle.Frequently money has been "tight" during periods ofdeflating, and many borrowers have discovered to theirregret that money optimistically borrowed when businesswas booming could not be repaid during a recession.

CONSUMER PURCHASES

Consumers' durable goods (automobiles, washingmachines, television sets, refrigerators, etc.) can be

purchased most advantageously during recessions. Unless awar interferes with the usual cyclical movement, replace-ment of these items may be delayed without seriousinconvenience for several years or until deflating hasreduced prices to relatively low levels compared to thoseduring the preceding or subsequent inflationary period.

Some types of insurance (fire, property damage, home,automobile, etc.) may be varied in amount as changesoccur in the price level, so that proceeds will be adequatefor replacement in the event a loss occurs. This procedurecannot be applied easily to life insurance, however. Asatisfactory measure of earnings that would be lostthrough death or disability has never been developed, andthe proceeds of life insurance become inadequate afteronly a decade or two of substantial inflating.

Although no complete solution for this particularproblem is available, as a rule of thumb partial protectionmay be obtained during a boom period of high or risingprices by increasing the amount of insurance carried.Proceeds of the insurance then would adequately providefor dependents in the event of a loss. During the recessionphase of the business cycle, more insurance than wouldbe needed to maintain care for dependents at the thenprevailing price level should be carried if practicable.Although the latter procedure might not afford protectionsufficient to support dependents during a boom period,the extra margin of protection available would obviateany drastic readjustments.

In maintaining adequate life-insurance protection, mostindividuals will find term insurance most suitable for theirneeds.*

INVESTMENT PLANS

The primary purpose of an investment portfolio at agiven time is related to the particular period in theeconomic lifetime of an individual. During the earlier andmiddle working years, speculative investment plans maybe risked and may even be preferable. But during laterworking years and subsequent retirement, a conservativeinvestment plan usually is best.†

A knowledge and understanding of business-cycletrends also is required for sound investment planning.Once the primary purpose of an investment program hasbeen decided upon, changes in the allocation of funds tofixed-income and variable-income securities are based inpart on business-cycle changes.

To avoid misunderstanding of this comment regardingchanges in allocation of funds to fixed- and variable-income securities, we caution that consistently accuratepredictions of business-cycle changes more than a fewmonths ahead are not yet possible. Consequently,investors should not attempt to sell all common stocksduring periods of prosperity and to reinvest all their fundsin common stocks during recessions. Instead, they shouldreduce the percentage of allocation in common stocks atan appropriate time during prosperity (inflationaryperiods) and increase the percentage of allocation thereinat an appropriate time during recessions (deflationaryperiods). This procedure has resulted in the past ininvestors purchasing most of their securities at below-average prices, and long experience indicates that those

*For an extensive discussion of life insurance, see the Institutepublication Life Insurance and Annuities from the Buyer's Pointof View.

†For a detailed discussion of this aspect of investment procedure,see the Institute publication How to Invest Wisely by C. RussellDoane.

14

who believe they can do better by heeding other adviceprobably will lose more than they gain.

In an earlier section we discussed the long-termdepreciation of the dollar that has been in progress forseveral decades and that may continue for many more.This development, and recurring threats of uncontrolledinflation, constitute an important reason for even themost conservative investors to invest a portion of theirfunds in common stocks. Advantage can be taken ofbusiness-cycle changes by making most purchases ofcommon stocks during recession periods and by weedingout securities that prove to be least desirable duringperiods of prosperity.

THE BUSINESS CYCLE AND THE LIFETIME PHASE

General comment on the effect of business-cyclechanges during each of the three principal phases of one'sworking lifetime may be helpful. We have pointed outthat during the earlier working years, failure is not asserious, because responsibilities to others are small andthe natural resilience of youth can be counted on for thecomeback needed to attain eventual success. Youth is thetime of life when great risks can be assumed. Conse-quently, during this early period the individual may takegreater risks in attempting to take advantage of cyclicalmovements and trends. During one's earlier working years,effective use of cyclical movements might be made bysaving as much as possible during the inflationary phaseof extreme prosperity and purchasing a business, realestate, or stocks when the deflationary phase appears to

have ended. Although during deflationary periods condi-tions are not propitious for business as a whole, manyopportunities for wise investment of funds exist.

During the middle and later working years, great risksshould be avoided. Advantage can then be taken ofcyclical changes by withdrawing from speculative invest-ments and enterprises during boom periods. Experiencemay then be an aid in taking advantage of recessionperiods in order to concentrate one's important purchasesat such times.**

**Although consistently accurate prediction of business-cyclechanges is not yet possible, the current phase of the business cycleordinarily can be ascertained. Indexes reflecting changes in variousgroups of prices, fluctuations in production, and informationabout the credit operations of the banking system that increase ordecrease the purchasing media in circulation are available frommany sources.

One of the principal tasks of the Institute is to analyze suchinformation, make appropriate comparisons, and publish theconclusions in the weekly Research Reports. We have endeavoredto make this publication the best possible single source ofinformation on fundamental economic trends and relationships.Consequently, readers who do not have the time to analyze triedata from original sources may find our bulletins helpful.

Other readers who desire to investigate the subject in greaterdetail will find useful the following references: the financialsections of leading newspapers; the various monthly bank reportsof credit and business conditions such as The National City BankLetter; the Federal Reserve Monthly Chartbook; the FederalReserve Bulletin; the Survey of Current Business and BusinessConditions Digest issued by the United States Department ofCommerce; the Monthly Labor Review issued by the Departmentof Labor; Government Statistics for Business Use by P. M. Hauserand W. R. Leonard, John Wiley & Sons, and Prosperity andDepression by Gottfried Haberler, Harvard University Press, 1960.

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IV.TYPICAL BUSINESS GROWTH TRENDS

B usinesses grow and decline at varying rates and forvarious reasons. However, a general pattern ofsuch trends usually occurs among individual

businesses and industries. First we shall consider thetheoretical growth pattern of a theoretical company.

THEORETICAL GROWTH PATTERN

Let us assume that some enterprising young genius hasinvented a new product, ACE, a device with variousadvantages calculated to insure its appeal to the generalpublic. The inventor decides that this product has a vastpotential market, and so he forms a company tomanufacture and market ACE.

In the early stages of its existence, The ACE Companymay not expand rapidly. Many experiments are requiredto test uses of the product, and some of the items mayturn out to be defective. Because of the expenses involvedin improving the product and in overcoming consumerignorance and resistance to ACE, the initial price isnecessarily high. The market, therefore, is limited, and thecompany may lose money for several years beforeoperations become even moderately profitable.

However, the period of experimentation may result inan improved product that can now be manufactured inquantity by automation rather than by hand. Conse-quently, the price can be reduced and the marketexpanded. Further modifications of the basic productmay permit its adaptation for use in the home as well asin the factory, and still larger-scale manufacturing maypermit further reductions in manufacturing costs and theretail price. These developments will encourage rapidgrowth in both sales and profits during this intermediatestage.

Although this period of rapid growth may continue formany years, inevitably a time will be reached whengrowth diminishes. Further improvements in the manu-facturing process are difficult to make, and so costs andthe retail price cannot be substantially reduced. Moreover,the demand for the product does not continue to increaseindefinitely. ACEs do not wear out rapidly, so replace-ment sales are small. Every home and business that canafford one has one by now, and new sales are confinedmostly to new uses. In addition, other competitive or

TIME IN YEARS

substitute products may have been developed that affectthe market for ACEs adversely. During this third stage,The ACE Company is approaching maturity, and sales andprofits increase at a diminishing rate. Eventually, ACEsmay be superseded by more modern devices, and the ACEindustry may pass out of existence as the productbecomes obsolete and no longer of use.

This theoretical example illustrates three stages ofindustrial growth prior to an actual decrease in demandfor the product. If plotted on arithmetic graph paper,such a theoretical growth trend might look like anelongated "S," as shown on the chart on this page.

INDUSTRY GROWTH PATTERNS

Few industries have experienced a growth patternsimilar in all respects to that just described. To someextent the consumer goods industries, which have acomparatively short growth cycle, follow this trend. Forexample, production of automobiles, radio and televisionsets, and refrigerators seem to have followed this growthpattern. On the other hand, some natural resourceindustries have grown for a century or more withoutfollowing any particular pattern.

The reasons for divergent production patterns amongindustries are many and varied. In one of the best booksavailable on the subject* the author suggested severalreasons for divergence of production trends. Theseinclude: invention of new commodities; development ofnew raw materials; discovery of new mineral resources;changes in the methods of production; transformation ofindustrial equipment; recovery of waste products; changesin form of industrial organization; an increase in numberof uses to which raw materials are put; and emergence ofa variety of luxury products and stylish goods.

The statistical evidence included in that book clearlydemonstrates the differences in the rates of growth ofvarious industries in the United States. Of interest also isthe fact that the beginning stages of most industries areseldom marked by the slow but increasing rates of growthsuggested by the "S" curve. On the contrary, productionin the early stages usually is characterized by violentfluctuations. Many companies enter the field; changes inthe product are rapid; competition for the new market iskeen; and failures and bankruptcies mark the departure ofthe less successful companies. For example, hundreds ofenterprises have been organized to manufacture auto-mobiles in the United States and overseas since 1900, butonly a few have survived. Only after competition haseliminated the weaker companies and several well-established organizations dominate the field does a typicalgrowth pattern become evident.

The major conclusion that seems justified from thestatistical evidence available is that "an industry tends togrow at a declining rate, its rise being eventually followedby a decline."† However, the lives of various industriesare not of equal length. A luxury good or a "fad" mayexperience a complete life cycle within a few years; on

* Arthur F. Burns, Production Trends in the United States Since1870, National Bureau of Economic Research, Incorporated, NewYork: 1934.†Burns, op. cit., page 173.

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TEXTILE CONSUMPTION

the other hand, the petroleum industry has not yetreached maturity after almost a century of growth.

The growth rates of several American industries areshown in the charts above. The first illustrates the widedivergence among the long-term growth trends of thecotton, wool, rayon, and silk industries. The index ofindustrial production is included for comparative pur-poses. A ratio chart has been used; consequently, rates ofincrease or decrease are comparable throughout. A scale isprovided in the left margin of the chart so that thepercentage increase of production in any one industryover a period of years may be ascertained. Perhaps theeasiest way for readers to do this would be to mark on acard the vertical distance to be measured and thenmeasure the marked distance on the percentage-changescale.

Both the cotton- and wool-manufacturing industries areexcellent examples of industries that appear to havereached maturity. From 1885 to 1916 industrial produc-tion increased at a rate of 4 percent, compoundedannually, but the rate of increase of cotton consumptionduring the same period was less than 1 percent,compounded annually. From 1916 to 1935 consumptionwas relatively stable. During the early years of World WarII, cotton consumption increased to a new high level.Although a decrease occurred after the war, consumptionremained above that of the prewar period except duringthe 1948-49 crop year. The Korean War resulted inincreased demand, but since then consumption has beenless than the World War II peak levels. For the entireperiod, growth was only gradual.

The long-term trend of wool consumption from 1885to 1923 increased at a slower rate than that of cotton,and from 1923 to 1934 the general trend of woolconsumption was downward. Consumption increasedmarkedly thereafter, primarily because of the develop-ment of improved light-weight wool fabrics that gainedwide acceptance for the manufacture of women'sclothing. Moreover, there was a substantial demand lorwool uniforms during the war and for civilian goods inthe years 1945-48. Since then, however, the trend ofwool consumption has been downward.

The manufacture of silk textiles expanded steadilyfrom 1911 to 1929 but has since decreased rapidly. Themain causes for the rapid decline in the consumption ofsilk are the substitution of rayon and nylon in manyitems, especially hosiery, and the resulting shift of manymills from the manufacture of silk cloth to theproduction of cotton and rayon fabrics. This industry isan outstanding example of one that rapidly reachedmaturity and subsequently declined.

Since about 1900, synthetic fibers have becomeincreasingly important. Between 1920 and 1950, use of

these products increased from less than 1 percent toalmost 23 percent of total domestic fiber consumption.The first major types of manmade textiles were thecellnlosic rayon and acetate filament yarns. Later rayonand acetate also were produced in the form of shorterstaple fibers. The growth trends of cellulosic yarn andstaple are illustrated on the chart. (The word "rayon" onthe chart includes both rayon and acetate.) For bothproducts the initial periods of rapid uninterrupted growthhave been followed by a slackening of the initial rate andan increasing vulnerability to minor reversals. However,the over-all long-term trends of growth are vastly morefavorable than those of the natural fibers.

During the past 2 decades, a variety of new manmadefibers has been introduced. These include nylon, acrylic,and glass fibers. The recent growth of consumption ofthese noncellulosic fibers has been comparable to theinitial growth of the cellulosic fibers.

The second chart illustrates the growth trends of twoof the largest industries in the United States. Crude oilproduction was begun in 1857, and the chart illustratesyearly production from 1860 to date. Although auto-mobiles were manufactured as early as 1895, productionstatistics are available only since 1900. These data also areplotted on a ratio chart, and a scale is provided at the leftfor the measurement of percentage changes.

Motor-vehicle production in 1929 reached a peak thatwas not exceeded until 1949. However, the productiondata reveal the pattern of an industry that has reached itsmaturity. The trend of production seems to have beendownward at times, and the totals in the peak years,1937 and 1941, were both less than that of 1929.However, in making up for the lack of production duringthe war years, the 1929 production level was exceeded by1949. From a trough in 1958, annual automobileproduction increased to a record peak in 1965 that hasnot been exceeded since.

On the other hand, the petroleum industry is anoutstanding example of an industry that as yet shows noindication of having reached maturity. Although the rateof growth since 1900 has not been so rapid as that forthe preceding 40 years, the trend of production stillappears to be upward.

A closer examination of the growth trend will revealtwo or perhaps three subordinate trends. These trendsreflect the different uses of the product. From 1860 to1900 kerosene was the major refined product, because theprimary use of petroleum products was for illumination.Use of the electric light spread rapidly after 1900, and aleveling-off of petroleum production occurred about thattime. However, automobile production began to increaseafter 1900. The upward trend of automobile productionwas paralleled by a renewed upward trend of petroleumproduction. Of course, gasoline replaced kerosene as theprincipal refined product.

When automobile production began to level off after17

1923, petroleum production was affected also. Neverthe-less, petroleum production has increased in the periodsince 1932 at a much faster rate than has automobileproduction. This development reflects the increasing useof petroleum products as a source of energy in place ofcoal. In 1900 crude oil and gas provided less than 10percent of the total energy used in the United States, butin 1968 these products provided about 75 percent.Furthermore, petroleum has become an increasinglyimportant raw material for the chemical industry.

GROWING INDUSTRIES TODAY

Several industries now seem to be in the earlier stagesof economic growth. Those industries that supply poweror power-producing materials, such as petroleum, naturalgas, and electricity, are among those with the morefavorable growth trends. Some companies engaged intransporting petroleum and natural gas also have grownrapidly in recent years.

The manufacture of electronic devices has increasedrapidly since the war and probably will continue toincrease. Technological progress has been extendingmarkets in this field by improving old products andintroducing new ones faster than products have becomeobsolete. Contemporary developments accentuating thetrend are increasing labor costs (which spur automation)and modern weaponry and space exploration.

Another area of rapid postwar development is the pro-duction of specialized materials and equipment for super-sonic flight and atomic energy. Most of this early develop-ment has been done by companies already in existence, sothat no new industry has been established as yet.

Air transportation has increased markedly in recentyears, and further growth seems probable. Involved in thisgrowth is the production of larger and faster aircraft andthe increasing acceptance of helicopters for special uses.

GROWTH OF TOTALINDUSTRIAL PRODUCTION

Some readers may be interested primarily in the growth500

400

300

200

100

40

20

10

rates of particular industries; others may have reason tobe more concerned with the composite growth rate of allindustries in the United States. As we pointed outpreviously, no one statistical measure can include all ofthe industries in the country; even if data were available,the task of compilation would be enormous. Oneindicator that may be useful, however, is the index ofindustrial production shown in the accompanying charton this page. The long-term growth of industrialproduction as well as the short- and intermediate-termfluctuations are clearly shown.

The method of computing this index may be ofinterest. Records of the physical volume of productionare obtained for the major industrial groups, whichinclude directly or indirectly the greater portion of allindustrial production in the United States. The industriesrepresented are: durable manufactures, which include,among other things, iron and steel, nonferrous metals,lumber and furniture; nondurable manufactures, whichinclude textile, tobacco, leather, paper, and petroleumproducts; mining; and utilities. The indexes for theseparate industries are weighted roughly in proportion tothe dollar values of the respective outputs, so that thecombined index is representative of all industrialproduction. The average monthly value for the period1935-39 (the base period) is made equal to 100, andproportional changes are made in the data for other yearsso that the final index numbers show industrialproduction as a percent of the average from 1935 to1939 inclusive.

In the preparation of the index, the data from 1884 to1918 were taken from Standard and Poor's index ofindustrial production. The index numbers from 1919 to1938 are those compiled by the Federal Reserve Board.The data from 1939 to date are based on those providedby the Federal Reserve Board but include adjustmentsmade by the Institute in order to eliminate seriousdistortions in the index. The adjusted data have beenplotted on a ratio chart, which facilitates comparison ofrates of change during different periods.

Careful study of this chart may help readers to

r_y\

M\rH r ™

INDUSTI(Sea

Alhr

*IAL PROtonally Adjus

w1

r

DUCTIONted)

1

njÀ

y

1860 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20 '25 '30 '35 '40 '45 '50 '55 '60 '65 '70

18

understand the importance of growth trends. In spite ofcyclical recessions, the long-term trend of production hasheen upward and probably will so continue for a longtime to come. Even a depression as severe as that oíL929-32 did not force production to a level below that ofthe depression immediately prior to World War 1. Thepeak reached in 1937 was greater than that of 1929.During World War II, production was increased to levelsnever before reached. After a brief period of postwarreadjustment, production increased to levels even higherthan those of the war years.

The full significance of the growth trend shown maynot be apparent at first glance to readers unfamiliar withratio charts. Production today is nearly 10 times thelowest volume reached in 1932 and is nearly 5 times theproduction at the peak of the 1929 boom. From thelowest point reached in the first year of this century,industrial production has been multiplied more than 25times.

ADJUSTMENT TOBUSINESS GROWTH TRENDS

Younger men who are beginning a career or men whoare starting in business will find the growth trend of theirchosen occupations of much importance. Industries thathave reached or are approaching maturity offer lessopportunity for advancement than those industries thatare still in a growth stage. Older and well-establishedcompanies have pre-empted the field; older men occupydominating positions in the industry, so that advancementordinarily will be slow.

On the other hand, the rapid changes usuallyexperienced in the early stages of an industry's growthindicate that attempting to work in a new industry maybe unwise unless the risks involved can be assumed. Thisis particularly true for men in middle age or later workingyears, when losses cannot be so easily regained.

From the point of view of investment, selection ofsecurities, particularly common stock, should be based onfundamental economic and long-term considerations.Stocks should be purchased for long-term holdings;experience has indicated that attempting to take advan-tage of the interim fluctuations of the market is aprocedure few people can follow profitably.

One of the important measures of the suitability of aparticular security is the long-term growth prospects ofthe industry concerned.* Of course, mere growth doesnot insure that investments in an industry will be safe andprofitable. Other factors, such as a competitive situationin which no one company has any particular advantage,may make investment undesirable. For example, the keencompetition in the television industry made purchase oftelevision stocks unwise, at one time, because there wasno assurance that any one company would continue tooperate successfully and profitably during the next decadeor two.

*ln the industry studies and analyses of individual corporationsemphasis is placed first on the growth prospects of the industry inrelation to the growth of the country as a whole and then onthose companies that are expanding at a faster rate than the restof the industry. The securities finally recommended for purchaseare included in the Investment Bulletin, published by AmericanInstitute Counselors, Incorporated, Great Barrington,Massachusetts.

19

V.

THE TECHNOLOGICAL ADVANCE

T echnological change has been a major factor inman's progress from the savage state. Ever sincecrude weapons and tools were fashioned from

sticks and stones and fire was used for warmth andprotection, man's adaptation of his environment hasenabled him to enjoy an increasing quantity of materialgoods.

Of course, technological change has occurred in otherparts of the world as well as in the United States.However, the discussion will be limited to this country,because rapid technological growth has occurred herewithin a relatively few decades and because conditionshere apparently have been unusually favorable.

Before the early settlers from Europe reached America,the land supported a relatively sparse population. Exceptfor planting maize and some vegetables, the Indians livedprimarily by hunting and fishing, and the population inmany places nearly exhausted the available resources.

Today the same area supports a population many timesthe number of those whom the white settlers displaced.The Nation's vast natural resources, the soil, coal, iron,copper, oil, and other natural materials have been usedfor the production of wealth in ways that the Indians orthe early settlers never dreamed of. The result has beenthat today the relatively large population enjoys astandard of living higher than that enjoyed when thepopulation was much smaller.

Of course, the early white population brought fromEurope agricultural and industrial knowledge that madepossible the production of more wealth, as measured infood and other goods, than the Indians were producingby means of their more primitive methods. However, thegreat difference between the production of wealth percapita today and that in the Colonial period isattributable primarily to the technological advance.Briefly, technological progress consists of finding newrelationships between things found in nature or makinguse of relationships already discovered in order to satisfyhuman desires. The relationships concerned may be foundby scientists in their laboratories or elsewhere, butapplication of the knowledge gained may be postponedfor years until some practical application of therelationships is discovered.

On the other hand, invention and practical applicationmay precede the acquirement of more than elementaryknowledge about physical relationships. For example,electricity is widely used today, although understandingof electricity itself may be at a relatively primitive stage.

TYPES OF TECHNOLOGICAL PROGRESS

The technological advance goes forward in variousways, but most of the applications of technologicalprogress to the production 01 wealth may be consideredin three general classifications. The first is the intro-duction of new capital equipment in order to replacemanual operations. An outstanding example is providedby the automobile industry. Motor cars were offered forsale before the turn of the century, but quantityproduction and the assembly line were not used untilafter 1908. The rapid growth of the industry thereafterwas described in the preceding chapter.

The mechanization of agriculture offers anotherexample of the substitution of machines for hand labor.In the four decades after 1899 the output of farmproducts increased about 50 percent; however, theagricultural-labor force decreased nearly 10 percent duringthe same period. The National Bureau of EconomicResearch has estimated that from 1870 to 1939 outputper farm worker nearly tripled.* Much of this gain inproductivity is attributable to the mechanization of farmwork.

The second classification of technological progress ismodification of the character of capital goods already inuse. The increased efficiency of steam-generating plants inthe electric-light and power industry provides an illustra-tion. In 1902 more than 6.5 pounds of coal were requiredper kilowatt-hour generated, but only 1.29 pounds wererequired in 1946.T For larger generating stations, thisfigure was as low as 1.12 pounds in 1946.

Another example is provided by the improvement inthe efficiency of coal-burning locomotives. In 1916locomotives on class I steam railroads consumed 169pounds of coal (or coal equivalent) per 1,000 grosston-miles of freight service, but in 1946 only 116 poundswere required.**

The third classification of technological progress is themore effective use of raw materials. Included in thisclassification are the use of raw materials in addition tothose previously used, development from existingmaterials others not found in a natural state, and moreeffective utilization of materials already used.

The petroleum industry provides an example of the useof a raw material found in nature, first to provideillumination and later to provide motive power. In thesame industry better use is now made of materialspreviously known. Natural gas, formerly considered wastematerial and permitted to escape into the air, now isbeing conserved and used as a valuable fuel.

Utilization of scrap in the steel industry has provided anew use for material that formerly was wasted;approximately 40 to 60 percent of the input ofopen-hearth furnaces is scrap metal, and some furnacesuse scrap exclusively.

Much of the chemical industry is concerned withdeveloping new materials not ordinarily found in nature.Coal, petroleum, air, and water have become the basis foran increasing number of products such as nylon,cellophane, insecticides, and plastics.

One result of the technological advance that hasoccurred is an increasing diversity of products available toconsumers as well as improvement in items alreadyavailable. The development of new or improved productsmakes available new consumer goods, and the demand forthese goods encourages their development. Man's totalwants are insatiable; he constantly seeks better ways tosatisfy his primary needs for food, shelter, and clothing as

*Harold Barger and Hans H. Landsberg, American Agriculture1899-1939, National Bureau of Economic Research, Incorporated,New York: 1942.‡Electric Utility Cost Units, Federal Power Commission DocumentF. P. C. S-68, p. 14.**Bums, op cit., p. 131; Statistics of Railways in the UnitedStates, 194b, Interstate Commerce Commission.

20

well as new and better productsdesires.

to satisfy his many oth<`

EFFECTS ON YOUR LIFETIME PLANS

The most obvious eííeet of the technological advanceon many individuals has been the necessity of seeking anew job. For example, employees of the horse-drawn-carriage industry were forced to learn new trades whenthe automobile became available in large numbers atprices the average family could afford.

However, other job opportunities íor those displacedby the technological advance have been provided, eitherin the same or another industry. For example, in theelectric-light and power industry output per manincreased 6.5 times from 1902 to 1942. However, rapidadaptation of the product to a multitude of uses resultedin increasing the number employed by the industry 7.7times during the same period.†† The opportunities foremployment in the automobile industry presumablyabsorbed many of those displaced from carriage manu-facturing.

From the businessman's point of view, the swifttechnological advance in the past century emphasizes the

††J. M. Gould. Output and Productivity in the Electric and GasUtilities, 1899-1942, National Bureau of Economic Research, NewYork: 1946, pages 73-74.

necessity of keeping abreast of the trend of newdevelopments in his own and related fields. Technologicalprogress provides a new frontier with the risks and richrewards of pioneer life íor those who lead thetechnological advance.

From a practical point of view, the businessman whocannot afford his own research facilities should availhimself of the information available in trade journals orthat usually provided by trade associations. Manyuniversities and private organizations undertake specificindustrial-research projects by special arrangements withindividual companies or trade associations. As long as thetechnological advance continues, new opportunities willbecome available and older materials and methods willbecome obsolete; obviously, survival requires adjustmentto progressive change.

From the investor's point of view, consideration of thetechnological advance is highly important in selectingcommon stocks. Some companies having monopolyprivileges, such as the utilities, or others having partialmonopolies of valuable natural resources, such as the oilproducers, may be reasonably satisfactory investmentseven if the companies concerned are not leaders in thetechnological advance. However, for most industrial andtrading concerns having no monopoly advantages, leader-ship in the technological advance or in scientificmanagement (preferably in both) provides a competitiveadvantage in the long run.

21

VI.

REGIONAL TRENDS

F or most businessmen and investors the best oftomorrow's opportunities probably will be foundin those localities where the economic growth rate

in recent years has been greater than the average for theUnited States. A young man planning his career would bewise to consider making his home in one of those areaswhere economic growth and future opportunities seemmost assured. Although some businesses may not prosperin those localities where the usually accepted indicators ofeconomic progress record the greatest rates of gain, suchbusinesses presumably will be the exceptions rather thanthe general rule.

POPULATION TRENDS

A growing population means more mouths to feed,more backs to clothe, more needs and desires of all kindsto be satisfied in order to promote human welfare. Theimportance of population growth as an indicator ofeconomic trends has long been recognized, and the crudeand absurd notions offered by Malthus in The Principle ofPopuL·tion have been discredited by the march ofscientific progress in the field of economics. HenryGeorge, the eminent philosopher and economist, clearlydemonstrated in his book Progress and Poverty that agrowing population in a particular area is usuallyaccompanied by a more-than-proportionate increase in theproduction of wealth. Population growth usually is anindication of economic progress.

In 1790 the population of the United States wasslightly less than 4,000,000 persons. The estimatedpopulation at mid-1969 was nearly 202,000,000. In spiteof the striking increase that has occurred, the rate ofgrowth, which is the vital factor in considering futuretrends, has decreased appreciably. This trend is clearlyshown by the following table.

RATE OFDecade

1790-17991800-18091810-18191820-18291830-18391840-18491850-18591860-18691870-1879

GROWTHPercent

353633343336362330

OF U.S. POPULATIONDecade

1880-18891890-18991900-19091910-19191920-19291930-19391940-19491950-19591960-1969

Percent26212115167

151913

Within a single decade the rate of population growthmay be changed substantially as a result of wars, famines,and other major influences. An example would be theincrease in the population that occurred during the 1950'sbecause of the large number of war marriages and the warand postwar increase in the birth rate. These suddenchanges will affect trade and business for short periods oftime. However, during periods of several decades suchchanges may not be important.

The trend of the "population center" of the UnitedStates has been westward during the past 70 years. Thiswestward migration apparently has not abated, and mayeven have accelerated, during the past decade; the most

recent population estimates since the census of 1960show that the Pacific States have gained more than 22percent in population since then. This increase is fargreater than that of any other region of the country, andwe know of no reason for assuming that this trend willnot continue.

The Far West region will probably have the greatestgrowth during the next decade. Among the statescomprising this region, including Alaska, Hawaii, Nevada,Oregon, Washington, and California, most rapid popula-tion growth probably will occur in the latter. California's1969 population of nearly 19.5 million probably willgrow to 25 million people by the end of the next decade.The commercial aircraft, electronics, complex instruments,computers, and oceanographic industries in California areexpected to grow rapidly. About half of California'seconomy is located in the Los Angeles area, but SanFrancisco also will grow with the region, especially as thefinancial center for that area. Alaska's recently discoveredrich oil fields will mean more activity for the entireregion as these are developed. Hawaii is expected toexperience a 20-percent annual growth in tourism.

The Southwest region also probably will grow rapidlyduring the next decade. Consisting of the states ofArizona, New Mexico, Texas, and Oklahoma, this region's1969 population of 16,338,000 is expected to grow toabout 18,649,000, or 14 percent. The second largest gainin population among all states in the 9-year period sincethe 1960 census, 30 percent, occurred in Arizona.

Texas probably will continue to experience rapidpopulation growth during the next decade. The metals,petroleum, and chemicals industries are expected to growrapidly. The Port of Houston, which is the third largest inthe Nation, is expected to grow rapidly. Electronics andcommunication equipment industries probably will aug-ment growth in the Dallas-Fort Worth area.

The Southeast also is expected to grow rapidly. Thepopulation of this region of 44,332,000 in 1969 isexpected to increase 11 percent to 49,050,000 by 1979.This region, made up of the states of Virginia, WestVirginia, Kentucky, Tennessee, North Carolina, SouthCarolina, Georgia, Alabama, Mississippi, Arkansas, Louisi-ana, and Florida has continued to be the poorest part ofthe United States. Relatively low-wage labor probably willcontinue to attract industry to this area. During the nextdecade, diversification of existing industries is expected tobe widespread. One in every three new factory jobs in theNation during the next decade are expected to be locatedin this region in such industries as food products, paperand printing, chemical products, and furniture.

Industrial growth will benefit the states of Arkansas,Tennessee, southern Florida, and the Atlantic area ofGeorgia, through an anticipated influx of science-orientedcompanies operating in space, electronics, computers, andaircraft. The new oceanographic industry developing inthe area is expected to reveal hitherto unknown resourcesthat could lead to further industrial expansion in thecoastal regions.

The Rocky Mountain States, including Montana, Idaho,Wyoming, Utah, and Colorado, are expected to increase inpopulation from 4,830,000 in 1969 to a total of5,493,000 ten years hence, or 14 percent. Oil and

22

minerals production is expected to grow in this area.Extraction facilities, mainly in Utah, will providemagnesium and other minerals, especially around the SaltLake City area.

The populous Mid-east region, comprising New York,Pennsylvania, New Jersey, Delaware, Maryland, and theDistrict of Columbia, is expected to grow from42352,000 people at mid-1969 to about 46,731,000persons during the next decade, or 10 percent. Growth inthe Mid-east region, however, will probably be less rapidthan that in many others. New York City's growthprobably will be limited to the established activities offinance, transport, communications, the arts, and somelight manufacturing. Many of the larger cities in theMid-east area probably will experience further develop-ment of satellite cities in suburbs and surrounding townsto absorb the expansion, particularly around Washington,D.C., where further growth in Federal Governmentworkers is expected.

The New England region probably will grow from apopulation of about 11,500,000 in 1969 to 12,514,000 by1979, or at a below-average rate of 9 percent. The Bostonarea will continue to expand as a financial and researchcenter. The excellent educational facilities in the NewEngland area will continue to attract research and develop-ment firms. Recreation and resort facilities have expandedduring recent years and have contributed to New England'seconomic growth. However, about two-thirds of all indus-trial jobs in New England involve heavy industry such aselectrical machinery and transportation equipment, andfurther growth of such industries seems probable.

The Great Lakes region, with a 1969 population of39,981,000, will number about 42,721,000 people by1979, which would be a growth of only about 7 percent.Much of the heavy industry in the United States,involving the manufacture of steel, automobiles, and

machine tools, is located in this area. Expansion isexpected in such industries as electronics, heavy construc-tion equipment, and farm machinery. This regioncomprises Wisconsin, Michigan, Illinois, Indiana, and Ohio.

The Plains states, the last of the nation's regions to bediscussed, is expected to grow in population from16,097,000 in mid-1969 to about 16,800,000 a decadelater, or only by 4 percent. This smallest growth of anyregion will reflect diminishing farm employment. How-ever, establishment of other industry offering higherpaying jobs than were available on the farm will result ina more rapid increase in per capita income than that inother areas. Principal industries expanding in this sectionof the country are computers and electronics, recreation,communication and transportation, and the beef industry.The latter is expected to decentralize during the yearsahead into smaller plants located away from the centralcities. The Plains states include North Dakota, SouthDakota, Nebraska, Kansas, Minnesota, Iowa, and Missouri.

To summarize, population trends during the pastdecade indicate that future population growth will bemost rapid in the Far West and Southwest regions of theNation. Consequently, economic opportunities probablywill be greater in these regions than in others. In theabsence of any compelling reason for remaining elsewhere,young people whose working years are just beginning aswell as others would be wise to seek opportunities in theFar West and Southwest regions.

Outstanding economic opportunities will continue to beavailable in other regions, and the nature of many anindividual's work often will govern where he will live. Anunexpected development in a region of smaller populationgrowth might result in unexpected economic oppor-tunities there. Nevertheless, such opportunities generallywill be greater in regions where population growth isgreater.

23

VII.

LOCAL ECONOMIC TRENDS

I n addition to the regional economic trendsdiscussed in the preceding section, trends ofvarious types may be peculiar to the smaller

localities within which the economic activities of manyindividuals are concentrated. For example, the businessesof retail merchants in a county seat will be affected byeconomic trends that may be limited in scope to thetown or city concerned. Although many individualsaffected by these trends ordinarily will be in a goodposition to judge such changes and their effects, briefmention of the more important trends of this nature maybe helpful.

TRANSPORTATION FACILITIES

Trends in the development of transportation facilitiesmay have a critical bearing on local businesses. During theseveral decades when the Nation's railroads were beingconstructed the trend of railway development in manyinstances was a determining factor in the economicgrowth rates for many towns and cities. However, nowthat the railroad system has been virtually completed, thetrend of railway development is important only in rareinstances.

The trend of highway development is far moreimportant to most towns and cities today. In many Statesa policy of constructing express highways that avoidpopulation centers has been adopted. Where this trend ischaracteristic of new highway construction, the potentialfuture values of automobile service stations, touristaccommodations, and even some retail stores in centers ofpopulation may be adversely affected. On the other hand,the trend of land values along the bypass roads that mayeventually be used for express highways probably willincrease greatly as development is actually undertakenalong these routes.

Highway development may have an important bearingon the scope of marketing areas also. Local merchantshave a vital interest in the roads leading to theirestablishments and to those of their competitors in othernearby centers of population. Knowledge of the trend oflocal highway development therefore may be a key factorin preparing business plans.

The development of air transportation has morerecently become of vital concern to many localities. Areasformerly remote can now be reached within a few hoursfrom the larger centers of population. Consequently,developments of such localities for vacation sites andother purposes has now become or soon will bepracticable.

DOMINANT BUSINESS ENTERPRISES

In many towns and several of the smaller cities of theUnited States, one or two major business enterprisesperhaps dependent on continuation of Governmentcontracts are the dominating economic activities in thelocality. Under such circumstances, the trends affectingthe principal industry are of great importance to allbusinessmen in the area.

Most of the trends discussed in previous sections of thisreport should be considered in this connection. Particu-

24

larly important are the long-term growth trends of thelocal industry and the business-cycle fluctuations peculiarto that industry. For example, 75 years ago one town waswidely knows as "The Whip City." This once-dominantindustry virtually disappeared with the horse-and-buggyage, but the growth of other industries has prevented thetown from becoming a "ghost city" similar to some ofthe old mining towns of the West. Many other cities andtowns have been less fortunate.

As was mentioned in an earlier section, differentindustries are affected in varying ways by business-cyclechanges. For example, some of the steel-mill towns of thePittsburgh region become economically dormant duringthe depression phases of business cycles, because steelproduction usually decreases greatly at such times.Operators of retail stores and other businesses in theseareas should plan accordingly. They should realize thatfor many months in succession local consumers may beunable to continue former buying habits. In order to selleven a moderate portion of the goods sold in prosperousperiods, retail merchants may be forced to extend crediton a scale never undertaken by the merchants in citieshaving more diversified principal industries.

REAL ESTATE TRENDS

In the larger cities the trend of real-estate usage may bea most important long-term trend, especially from theviewpoint of retail-store operators and investors in realestate. The areas most desirable for retail stores,wholesalers, hotels, and many other types of businesseschange gradually over long periods. The businessman whoneglects to observe these trends and to govern his plansaccordingly may discover after a decade or so that hisbusiness is operating in an area no longer crowded withpotential customers.

Similar trends are also observable in many residentialareas. Sometimes such areas appreciate in value, but oftenthey depreciate as structures become older. In a few citiesresidential areas have depreciated greatly over a period ofhalf a century, but the trend has subsequently turnedupward as new residences or possibly luxury apartmenthouses have replaced the old and obsolete housing.

Because most of these local trends in real-estate usageand valuation are gradual, they often are overlooked bybusinessmen who fail to consider this aspect of theirproblems carefully. Many of the larger department storeshave sought to take advantage of changing circumstancesby opening branches in suburban shopping areas or bymoving outright to the newer retail areas in large cities.Many of the chain stores also reveal an alertness to theshifts in retail areas. Operators of smaller businessesshould be equally watchful of real-estate trends.

POLITICS AND TAXES

More or less clearly defined trends sometimes arediscernible in the political tendencies and tax rates of acommunity. In many American cities and even in some ofthe towns public interest in good, economical governmenthas gradually diminished. In such communities the localpoliticians usually take advantage of the public's apathy,

with the result that, even if outright stealing of publicfunds is not indulged in, the services provided by thecommunity are dispensed in such a way as to favorselected property owners and others friendly to thedominant political faction.

An upward trend of the tax rate may be an indicationthat community affairs are not being handled wisely.Furthermore, an increasing tax rate has a direct andobvious adverse effect on business enterprises not favoredby relatively low assessments and on home owners. Thecombination of unusually low assessments in favored areasand a high tax rate can both encourage land speculationand discourage prospective home owners.

When holders of potential business properties areencouraged by low assessments (and therefore a relativelylow total tax) to hold their properties indefinitely as ameans of gaining future appreciation in value, newbusinesses find prices for potential sites prohibitive. Theshifting of a large portion of the total tax burden tohome owners, which inevitably follows when potentialbusiness sites are underassessed in order to benefit vestedinterests, also discourages the development of residential

areas. In many towns and cities of the United States thiscombination of circumstances and the probability thatsuch trends will continue to retard economic growth.

Of course, a community is not doomed to a permanentloss of economic progress merely because its citizens havebeen indifferent in the past. Circumstances may change;well-informed citizens who are aware of the situation maysucceed in educating and arousing the public. In thatevent, the community may experience, as many have, aresurgence of economic activity, and decades of rapidprogress may follow.

That individuals may lose or benefit greatly from theeffects of local political and tax trends is obvious. In thisrespect, such developments are not different from othereconomic changes that have been mentioned. However,the local political and tax trends do differ in oneimportant respect: in all except the larger communitieseven a few public-spirited individuals may be able tomodify or even reverse unfavorable political and taxtrends. By analysis and appropriate action, readers canboth aid their personal business enterprises and improvetheir communities as well.

25

VIII.

WARS AND NATURAL CALAMITIESWARS

T he trends toward or away from war are notreadily measurable as are many of the othereconomically significant trends. Nevertheless, the

recurrence of wars during the many centuries of recordedhistory indicates that this form of human behavior hasbecome a firmly established custom. One may hope thatwar may eventually become outmoded, but such hopesshould not blind anyone to the unpleasant truth that warstill is considered by many millions of people a desirablemeans of settling both international and intranationaldisputes.

Furthermore, wars have influenced economic events sogreatly that the man who ignores the effects of a possiblewar on his business and personal plans may bedisregarding the greatest single danger of all. Wars do notrecur with the regularity of business cycles, but worldhistory of the past two or three centuries reflects a majorwar for most important nations every 20 to 30 years.Therefore, we believe that individual readers should beprepared for at least one and perhaps two major warsduring their working lifetimes.

The effects of wars on economic affairs may beconsidered in two principal classes: 1, the effects oninternal economic relationships; and, 2, the effects onexternal economic relationships. Of course, such separa-tion of the effects of war is merely a convenience for thepurposes of this discussion; in the world of actual eventsthe internal and external effects of war are sometimesdifferent aspects of the same general developments.

INTERNAL EFFECTS

The principal internal effect of most wars is markedinflating. When financing war efforts, governments usuallyfind that increasing taxes enough to meet the cost of thewar is inexpedient. Taxes usually are increased greatly,and the current savings of individuals and businesses areborrowed by selling government bonds. Recent majorwars, however, have required even larger expendituresthan the funds easily obtainable by these noninflationaryprocedures. Rather than increase taxes further or adoptmeasures that would force the public to increasemonetary savings from current income, governments haveobtained additional funds by inflating.

During the Revolutionary War, the inflationary pro-cedure adopted was the printing of paper currency by theGovernment. However, this crude means of inflating is nolonger used to a great extent. The more modernprocedure is for the governments concerned to printbonds instead of currency; the bonds are then sold to thecommercial banks in exchange for credits to thetreasuries' checking accounts; as those credits aredisbursed through the medium of treasury checks, theinflationary purchasing media are forced into the channelsof trade.

During World War II much of the inflationarypurchasing media created was hoarded. Individualsaccumulated both currency and funds in their checkingaccounts, and businesses accumulated funds in theirchecking accounts (thereby immobilizing or hoarding

purchasing media), because many of the things thatindividuals and businesses desired to buy were notavailable. After the war the accumulated purchasing mediawere used to bid for the desired goods with the resultthat prices rose greatly.

Similar trends presumably are to be expected duringand after major wars of the future. Furthermore, thesubsequent deflating as well as the prior inflating haseconomic consequences of great importance. The ultimatedownward readjustments of prices or the successivedevaluations of the currency undertaken in order to avoidthese downward readjustments have far-reaching conse-quences.

An example of a postwar downward readjustment notalleviated by devaluation is found in the course of eventsfrom 1920 to 1932. In spite of efforts to stabilize theprice level during the 1920's, prices ultimately declined toprewar levels with catastrophic results.*

Developments in France during recent decades provideseveral examples of inflating followed by devaluation ofthe currency in an attempt to avoid the catastrophic pricedeclines that deflating necessarily would have involved.Although devaluation provides temporary relief, it doesnot alone correct underlying maladjustments that lead todevaluation. Nevertheless, such a step seems to be theinevitable result of prolonged depreciation of a currency.

In the discussion of business cycles we mentioned thatinflating and deflating seem to have been responsible forthe more extreme fluctuations classified as business-cyclechanges. We have found many indications that all businessfluctuations sufficiently large to be classified as businesscycles by the National Bureau of Economic Research havebeen made possible by the inflating-deflating sequence.

As a result of our research on this aspect of economic

*These consequences were foreseen and described by theHonorable Elihu Root in 1913, when he was one of the Senatorsconsidering passage of the Federal Reserve Act. The followingextracts from his statements are well worth careful study andconsideration by everyone who must cope wîth inflation'sconsequences.

"The psychology of inflation is interesting, and it is wellunderstood. No phenomenon exhibited by human nature has beenthe subject of more thorough, careful, and earnest study than thatpresented by the great multitude of individuals making up thebusiness world in any country in the process of gradual inflation.It is as constant as the fundamental qualities of humanity, and itdiffers in different countries only in the degree, according to thehopefulness and optimism or the natural conservatism and cautionof the people.

"If the people of the United States have not wholly changedtheir nature from the nature which has been exhibited in all thefinancial history of England, from which many of us came; in allthe financial history of France, from which many of us came; inall the financial history of Germany, from which many of uscame; of Austria, of Italy; unless our human nature has beenchanged, we may confidently expect that under this proffer ofeasy money from a paternal Government, available for every oneof us, available to send the life-blood into the enterprise of everyquarter of our vast country, available to enable all young andhopeful and energetic Americans, East and West and North andSouth, to embark in business ventures which will lift them upfrom the hard conditions of daily toil, we may confidently expectthat the same process will occur that has occurred time and timeand time again in other countries . . . .

"So, Sir, if we enter upon this career of inflation we shall do itin the face of clearly discernible danger—danger which, if realized,will result in dreadful catastrophe."

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behavior, we have developed The Harwood Index ofInflation, which reflects the relationship between allpurchasing media in circulation and those of a noninfla¯tionary character. By analysis of the sources from whichthe available purchasing media are derived, we haveascertained what portions of the total are inflationary andnoninflationary.† In order to indicate the relativeimportance of the inflationary purchasing media, we useas our index of inflation the ratio of total purchasingmedia to the portion that is noninflationary. Theaccompanying chart shows the changes in this index from1914 to date.**

The great inflating during and immediately after WorldWars I and II are clearly shown by the index of inflation.Lesser inflating apparently made possible the extremecyclical fluctuations of the periods 1928 to 1932 and1935 to 1938, inclusive. However, for the purpose ofconsidering the internal effects of major wars, the datashown for the periods 1914 to 1921 and 1939 to date areespecially signifl· nt. A similar period of inflating shouldbe expected during the next major war.

The economic effects of wartime inflating are so manyand so varied that detailed discussion of them here is notpracticable. In general, however, the maladjustments thatoccur are relatively extreme forms of the business-cycledistortions described in an earlier section.

EXTERNAL EFFECTS

The external economic effects of a major warordinarily include interference with and sometimescomplete blocking of international trade. Businessesdependent on the import of certain materials used in theirmanufacturing processes and concerns dependent onforeign markets may experience great difficulties undersuch circumstances.

Manufacturers dependent on imported raw materialsmay be able to substitute synthetic or other materialsavailable locally. The only other insurance against thepossible adverse effects of war would be the accumulationand storage of several years' supply of the essential raw

materials normally imported. Space, spoilage, or otherconsiderations may make accumulation and storageimpracticable. Furthermore, the attempts of scientists inresearch laboratories to develop substitute materials mayfail. Unless and until some means of coping with thispotentially great danger is devised, any concern dependenton imported raw materials should be prepared, financially,for protracted periods of inactivity.

Businesses dependent on markets abroad also should beprepared for the interference to be expected during amajor war. By means of geographical diversification ofsales, the risk of some war losses will be increased, butthe risk of major losses will be decreased. However, firmsspecializing in the export business and manufacturers whosell most of their products abroad probably will find thatthey must be better prepared financially than mostbusinesses for prolonged periods of greatly diminishedactivity.

NATURAL CALAMITIES

Earthquakes, fires, floods, and hurricanes are theprincipal natural catastrophes that may have seriouslyadverse economic consequences. Like wars, the trendstoward these disasters are neither measurable norpredictable, but, also like wars they recur with varyingdegrees of regularity.

Major earthquakes sometimes occur as the culminationof a long series of minor earth tremblings that haveincreased in intensity over a period of several years. Homeowners and businessmen situated in regions known to besusceptible to earthquakes should carry earthquakeinsurance and should investigate foundation conditionscarefully before undertaking new construction.

In other portions of the Nation where earthquakes areextremely rare, investigation of the region's history maybe enlightening. Many present-generation home ownersand businessmen in the eastern United States may notknow that serious earthquakes have occurred in thatportion of the United States and that others probably willoccur in the future. In most localities where the danger ofearthquake losses is small, earthquake insurance is so

HARWOOD INDEXSEASONALLY ADJUSTED, 3MMA

27

inexpensive that there is no reason for individuals andsmall businesses to carry even the exceedingly small riskof loss involved. Although the chances of an earthquakemay seem to be negligible, the potentially great loss fromthe viewpoint of an individual home owner or business-man may justify the small cost of insurance protection.

The risk of damage by fire ordinarily is covered byinsurance as a matter of course. Consequently, commenton this aspect of the problem is unnecessary.

Floods recur as regularly as the seasons, but theextreme floods that cause serious damage are essentiallyunpredictable. In many sections of the United States,however, serious floods have occurred often enough sothat some idea of their probable frequency can beestimated.

For many years the Army engineers have been engagedin flood-control studies of the Nation's principal riversand their tributaries. A wealth of information is availableto those who must live or do business in the areas subjectto flood. By studying the information pertaining to hisown locality, one can estimate how serious a risk he is

incurring and can then decide whether to obtain insuranceprotection or adopt other means of lessening the risksinvolved.

Hurricanes and tornadoes also recur with the seasons.However, there is no known means of predicting whetherthey will damage a particular locality. In many areas therecord of such storms is so brief, perhaps only a fewdecades, that a basis for estimating the probablefrequency of damage for such causes is not available. Inany event, insurance is the logical alternative whenconstruction of buildings is such that they cannot beexpected to stand against winds of hurricane velocity.

The foregoing list of natural disasters is by no meanscomplete. Crop failures have important economic effects,especially on the farmers concerned and on thebusinessmen operating retail stores in the areas concerned.However, we have attempted to indicate here only thegeneral approach to the problem. Most readers presum-ably will have no difficulty in applying the indicatedprinciples to the corresponding problems of theirlocalities.

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IX.

YOUR ADJUSMENTS TO ECONOMIC

TIDES AND TRENDS

R eaders presumably will desire to review their ownlifetime plans, taking into consideration theeconomic trends that can be discerned today. As

the first step in such a review, we suggest that thereader take time to examine his existing financialsituation. By listing present and expected resources andresponsibilities, one can ascertain whether or not theamount and nature of his assets are adequate for theresponsibilities involved in view of present andprobable future economic trends.

As the second step in reviewing an individual situation,we suggest that the questionnaire checklist given below bestudied in detail. Answers to the questions preferablyshould be written so that subsequent reappraisals will besimplified. If a separate sheet of paper or large card isused for the answer to each question, the correspondinganswers at the time of future reappraisals can be writtenon the same sheets with the dates of the successivereappraisals indicated. (Punched sheets and an inexpensivestandard 3-ring binder, which can be obtained instationary and variety stores, are recommended, so thatthe material will be readily available.)

Anyone who follows the procedure suggested willaccumulate a valuable personal or business file over aperiod of several years. (For a business the records mightwell be more elaborate and might include the consensusof views of the board of directors or principal officers.)We have shown the answers to the more general questionsas of late 1969. The implications of these answers withrespect to each reader's personal problem should beanalyzed and preferably written in the record for futurereference.

QUESTIONNAIRE CHECKLIST

1. What do you now estimate as the span of yourworking years?

Began 19 ; expect to retire ,

working years2. Based on your knowledge of your health, present

ability to carry a burden of work, etc., in what stage ofeconomic life are you now, and what ages do you nowestimate as the approximate limits of the following threestages? (Check "a," "b," or "c," but fill in the blanks onall three.)

a. Early working years, when knowledge is increasingrapidly, energy and capacity for sustained effort are alsoincreasing, and economic value measured by income-producing capacity also is growing:

Began at age : estimated continuing to age

b. Middle working years, when knowledge still isincreasing energy and capacity for sustained effort arenearly stabilized and economic value is still growing:

Beginning age . . . . ; estimated continuing to age

c. Later working years, when knowledge may b<̄

increasing, but energy and capacity for sustained effortare definitely decreasing, and economic value maystabilize or decrease:

Beginning age ; estimated retirement age

3. What is the status of the long-term trend relation-ship among gold production, purchasing media, andcommodity prices?

During World War II a vast amount of excess(inflationary) purchasing media was created, commodityprices increased greatly, and gold production consequentlydecreased. Subsequently, inflating continued with fewinterruptions and accelerated in 1965; since then thetrend of commodity prices has been upward. Becausethese excess purchasing media have not been removedfrom circulation, gold production has remained below andcommodity prices have remained above long-term trends.

4. What is the significance of the foregoing develop-ment for the lifetime plans of individuals?

The purchasing power of all savings, including lifeinsurance, social security, and pension plan reserves, hasbeen reduced to little more than one-third of what it hadbeen 30 years ago. Probable continuation of this trendwill make necessary prudent investment to minimizefuture loss of savings. Moreover, marked depreciation ofthe dollar has made it seriously vulnerable to devaluationand the United States and other free-world nationsextremely vulnerable to a severe economic depression.

5. At what stage of the intermediate-term constructioncycle are we at present?

Apparently a peak in the physical volume of theresidential construction occurred in 1964. An earlysubstantial increase in such construction seems improbableunless it is greatly stimulated by Government interference.

6. What is the current phase of the business cycle?Except for a brief interruption early in 1967, the

longest cyclical expansion of general business activity onrecord had continued for 100 months in June 1969. Thisexpansion probably was prolonged by accelerated inflatingbeginning in 1965. However, inflating did not continueduring 1969, and the percentage of primary leadingindicators of business-cycle changes expanding haddecreased to only one-quarter by midsummer. The latterdevelopment justifies doubt that the expansion of generalbusiness activity will long continue.

7. What is the significance for the individual of aprobable contraction of business activity?

Although a scientific basis for predicting the severity ofa business contraction is not available, existing seriousmoney-credit and other economic maladjustments makepossible a business contraction more severe than any thathave occurred since World War II. Even during a lesssevere contraction, individuals who have obligated a largeportion of income for repaying debt and whose incomesdecrease as a result of a reduction of overtime or bylayoffs might not be able to make repayments, with theresult that things not yet paid for would be repossessed.

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(Some automobile workers already experienced suchdifficulty during curtailment of production late in 1969.)

During contractions of business activity, failuresincrease among marginal businesses that are unable tomaintain sales or meet obligations. Individuals employedby such businesses are vulnerable to layoffs.

Declining business profits shortly before and during abusiness contraction result in decreasing prices of, andreduced dividends from, common stocks. Investors whohave not made appropriate changes in their portfoliossuffer losses of assets and income during such acontraction.

8. Is your financial situation or that of the businessproviding your employment vulnerable to a contraction ofbusiness activity?

9. At what stages of industrial growth are:a. The business that employs you?b. Other businesses that affect your job and your

locality?c. The businesses in which you have investments?

10. In which classification are the growth trends of:a. Your State and region?b. The States and regions where most of your

company's products are sold?c. The States and regions where the companies in

which you have investments are located?11. What will be the effects, if any, of regional growth

trends on:a. The market for products in which you are

interested?b. Local real-estate values and local business enter-

prises?12. What is the transportation trend in your locality as

reflected in the following:a. Increasing or decreasing railroad service in recent

years!b. Construction of new highways, through or bypass,

etc.?

c. Air transport facilities?13. What, if any, businesses dominate economic

activity in your locality? (If your locality is dominated byone or a few businesses, appropriate questions regardinggrowth trends of each, characteristics during business-cycle fluctuations, etc., are pertinent.)

14. What real-estate trends (shifts of shopping and

residential areas, etc.) are apparent in your community?15. Is the trend toward more efficient government in

your community, and what seems to be the trend of localtaxes in the past decade or two?

16. What effects would a major war have?a. On your personal finances?b. On the business in which you are engaged?c. On each of your investments?

17. What is the record of damage from and recurrenceof the following natural calamities in and near yourcommunity:

a. Hurricanes or tornadoes?b. Floods?c. Earthquakes?

18. What trends of the technological advance can youdiscern that may affect:

a. Your job?b. The business that employs you?c. The concerns in which you have invested your

savings?The foregoing questionnaire checklist and the reader's

answers thereto should constitute the foundation for theeconomic analysis of his lifetime plans. Depending ontheir circumstances and the aspects of the analysis mostimportant to them, individual readers should expand thechecklist to fit particular circumstances. In this connec-tion, a rereading of pertinent sections may be helpful.Many businessmen probably will find that special researchby their own staffs or outside research groups is justifiedin order to obtain the best possible answers to the mostimportant questions.

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