Business Cycle

Business Cycle. As far back as reliable statistics for the American economy exist, periods of expanding output and employment have alternated with periods when output and employment have contracted. This pattern has also characterized the economies of the other industrial nations. Although such fluctuating “cycles” have been irregular in amplitude and duration, the word “cycle” does emphasize their recurring nature.

Systematic research into the U.S. business cycle dates to the early and mid‐twentieth century work of Wesley C. Mitchell, Arthur F. Burns, and others associated with the National Bureau of Economic Research (NBER), a private organization whose widely used dating of business cycle peaks and troughs has been accepted by the U.S. Department of Commerce. The NBER considers a recession to have occurred when output, employment, and trade have declined for at least six months. A particularly severe recession has been termed a depression, although no formal definition of depression exists.

Because of the paucity of data for earlier periods, the NBER began its business‐cycle chronology with the recession that followed the cyclical peak of December 1854. Significant economic downturns clearly occurred before the 1850s, however. Major recessions, perhaps severe enough to be called depressions, took place in 1819 and 1837. The close linkages between the U.S. and foreign economies was evident in these early contractions. The 1819 downturn followed a decline in U.S. exports, particularly cotton. The protracted downturn that began in 1837 was set off when the Bank of England tightened credit. Because statistics on prices for these years are more readily available than data on production and employment, some economic historians have argued that the pre–Civil War cycles mainly affected prices and wages and not the real productive economy. Contemporary accounts, however, establish that noticeable increases in unemployment occurred in urban areas during contractions; soup kitchens for the jobless, for example, appeared as early as 1819.

In the Gilded Age, major recessions came during the 1870s, 1880s, and 1890s. The downturn that began with the cyclical peak of January 1893 was particularly severe, causing high unemployment through the remainder of the decade. The pace of industrialization exposed more workers to unemployment during these downturns. During the 1890s' depression, unemployment probably peaked at well above 10 percent of the labor force and may have exceeded 15 percent. As the fraction of the workforce experiencing unemployment during business‐cycle contractions increased, so did agitation for reform. The most visible manifestation of the pressure for government action during these years was the march of the unemployed on Washington, D.C., in 1894, led by Jacob Coxey of Ohio and popularly known as Coxey's Army. Local governments and private agencies, however, provided the bulk of assistance to the unemployed during the nineteenth century by expanding existing programs of poor relief and sometimes creating public‐works programs.

Most recessions in the post–Civil War period also brought financial panics during which banks, unable to satisfy their depositors' demands, suspended withdrawals, thereby exacerbating the crisis. For this reason, after a particularly severe panic and recession in 1907, influential figures demanded reform of the banking system. The 1913 Federal Reserve Act was designed to moderate recessions by providing a lender of last resort to banks experiencing liquidity problems. Although a brief but severe recession occurred in 1920–1921, economists attributed it to demobilization problems following World War I. Most observers were thus surprised by the length and severity of the downturn that began in 1929.

According to the NBER, the Great Depression of the 1930s began with the cyclical peak of August 1929 and reached its trough in March 1933, at which point the unemployment rate probably exceeded 25 percent. Unemployment remained high until 1941, when the reinstatement of the military draft and increased military spending stimulated the economy and expanded job opportunities. Economists continue to debate the causes of the Great Depression, some blaming the 1929 stock market crash, others the Smoot‐Hawley Tariff of 1930, and still others the series of bank panics during 1930–1933. President Franklin Delano Roosevelt's New Deal (building in some respects on initiatives dating to the Herbert Hoover administration) represented the first significant attempt by the federal government to ameliorate the impact of the business cycle.

Although many public figures and scholars feared that depression would return after World War II, the postwar business cycle proved relatively mild. The long expansion during the 1960s led many to declare the business cycle “dead,” but severe recessions in 1974–1975 and 1981–1982 revived concern about macroeconomic stability. Subsequently, however, the long expansion of the 1990s once more stimulated discussion about whether business cycles were inevitable in modern economic life.

Many explanations for the business cycle have been advanced. In earlier agricultural economies, some observers linked contractions to sunspots, which occur in fairly regular cycles. In the nineteenth century, Karl Marx proposed that cycles resulted from the tendency of capital accumulation to cause an overproduction of goods relative to the purchasing power of the working class. The British economist John Maynard Keynes provided the most influential explanation. In The General Theory of Employment, Interest, and Money (1936), Keynes attributed business cycles to fluctuations in total spending or aggregate demand. Controversy long raged between supporters of Keynes's theory and proponents of its main rival, monetarism or the neo‐quantity theory of money. Monetarists, led by Milton Friedman (1912–) of the University of Chicago, ascribed business cycles to fluctuations in the money stock. Toward the end of the twentieth century, many economists embraced a theory that saw the business cycle as an expression of the rational response of workers and firms to the economic impact of underlying technological transformations.
See also Agriculture; Antitrust Legislation; Banking and Finance; Business; Capitalism; Cotton Industry; Depressions, Economic; Economic Development; Economic Regulation; Employment Act of 1946; Foreign Trade, U.S.; Keynesianism; Mass Production; Monetary Policy, Federal; Multinational Enterprises; New Deal Era, The; Stock Market; Tariffs.

Bibliography

Arthur F. Burns and and Wesley C. Mitchell , Measuring Business Cycles, National Bureau of Economic Research, Studies in Business Cycles, No. 2, 1946.
Milton Friedman and and Anna Jacobson Schwartz , A Monetary History of the United States, 1867–1960, 1963.
David Glasner, ed. Business Cycles and Depressions: An Encyclopedia, 1997.
Michael D. Bordo, Claudia Goldin, and Eugene N. White, eds., The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, 1998.

Anthony P. O'Brien