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Published online by Cambridge University Press: 07 November 2014
The purpose of observation is to discover laws. The word “law” I use in Hegel's sense of a generalization, a determination of categories, which enables experience to be classified and rationally interpreted. We can never arrive at a complete knowledge of laws in this sense. If we could, the future would be known to us with as much certainty as the past. Hegel said that forecasting is not the province of the philosopher, and some of his own attempts in that direction, such as the subjugation of Asia by Europe and a monarchy for the United States, do not appear fortunate. The difficulties, however, are two: that laws are not truly or completely known; and that experience is not assigned to the proper categories. These conceptions, however, point the way. It would seem that economics has as much need as any other branch of knowledge for seeking laws in this sense. Although its steps may be faltering, they will be in the right direction if truth is sought by observation conceived as a quest for the laws which experience obeys.
I propose in this paper to present a short attempt along these lines, my data being taken from Canadian and United States economic statistics since the War. The following, therefore, is intended primarily as an illustration of method. It is hoped, however, that the conceptions which will emerge are also worth notice for their own sakes.
1 The curves which form the basis of the Harvard Index Chart of General Business Conditions are, and with negligible exceptions always have been, examples of the three classes of statistics discussed in the present article. For the exact constituents of the A, B, and C curves at various times, as well as for a description of the methods of selection, which aimed at avoiding a priori assumptions, see Bullock, C. J. and Crum, W. L., “The Harvard Index of Economic Conditions: Interpretation and Performance, 1919-1931” (Review of Economic Statistics, vol. XV, 08, 1932, pp. 132–5).CrossRefGoogle Scholar
2 Variations in the yield on 90 United States common stocks may be seen from the following figures, in which they are compared with the yield on 60 domestic bonds, both as reported by the Standard Statistics Company:
In this and other tables, a = high for the year; b = low for the year. Statistical data are taken, unless otherwise noted, for the United States, from the Survey of Current Business (United States Department of Commerce); for Canada, from the Monthly Review of Business Statistics (Dominion Bureau of Statistics).
The theory of interest on capital is, of course, implied by both the above statement and its illustration. This matter cannot, however, be here discussed. For part of the background of economic theory presupposed, reference may be made to articles of mine dealing with interest and capital in the Quarterly Journal of Economics, Aug., 1917, and Feb., 1919; and in the Journal of Political Economy, Dec., 1924.
3 Significant figures for Canada are as follows:
The ratio of brokers' loans to total market value of stocks varies considerably. The figures reported by the members of the New York Stock Exchange show this ratio as having reached 9.82 per cent. in September, 1929, and as having fallen to 1.18 per cent. in July 1932.
4 The following table compares for Canada (A) Industrial stock prices, index, base 1926; and (B) Bank debits, in millions of dollars; and also (C) Yield on Ontario government bonds.
5 There was a remarkable case of this abnormality in 1926-7, shown partially by Canadian figures, but better by the following for the United States:
These figures are computed from those published in the Annalist, Jan. 17, 1930, p. 210. From the complete set of figures, which run from 1883 to 1929, and from the corresponding graphs on pp. 110 and 111, it is evident that such an inverse movement is very exceptional.
6 The most important causal sequence here proceeds not from stock prices to money rates, but rather from the latter to the former. See part C of the present article.
7 An unusually good illustration of this took place in the middle of 1933, as shown by the following figures for the United States:
Increased activity in both business and finance is reflected in the second column of this table. The view that the decline in money rates which accompanied this was due to increasing confidence finds support in the last column, reflecting the return of money from hoarding.
8 Significant Canadian figures comparing steel production and common stock prices are given in the following table. They reflect in the earlier years the scarcity of capital equipment after the War.
9 The following are illustrative figures for Canada:
The conceptions discussed attracted attention at the time. See Crum, W. L. “Review of the Year 1932” (Review of Economic Statistics, vol. XV, p. 21)Google Scholar, See also Ebersole, J. Franklin, “One Year of the Reconstruction Finance Corporation” (Quarterly Journal of Economics, vol. XLVII, 05, 1933, especially at p. 468)Google Scholar, where Ogden L. Mills is quoted as follows: “Every additional decline in credit and prices and securities brings with it further bank failures, and bank failures in their turn lead to further contraction in credit and prices.”
10 See, for instance, Persons, Charles E., “Credit Expansion, 1920 to 1929 and its Lessons” (Quarterly Journal of Economics, XLV, 11, 1930, pp. 94 et seq.).CrossRefGoogle Scholar
11 See Fox, Bertrand, “Seasonal Variations in Selected Series of Weekly Data” (Review of Economic Statistics, vol. XIII, 02, 1931, p. 26).CrossRefGoogle Scholar See also Hubbard, Joseph B., “Currency in Circulation as an Index of Business Volumes” (Review of Economic Statistics, vol. XII, 08, 1931)Google Scholar and “Hoarding and the Expansion of Currency” (ibid., vol. XIV, Feb., 1932).
12 See Hubbard, Joseph B., “Commercial-Paper Rates and Bond Yields” (Review of Economic Statistics, vol. XIII, 02, 1931, pp. 34, 35).Google Scholar The graph there presented, which runs from the beginning of 1890 to 1931, supports both the statements in the text.
13 The following figures are for the United States:
14 The following table shows, for the United States, the approximate dates at which (C) monthly average commercial paper interest rates, adjusted for seasonal variation (as reported by the Annalist) crossed integral percentage figures from 1928 to 1931, compared with (A) the Dow-Jones average of industrial stock prices (in dollars per share) and (B) Business activity (Annalist index):
15 “One Year of the Reconstruction Finance Corporation” (Quarterly Journal of Economics, 05, 1933, p. 464).Google Scholar
16 An increase in rural relatively to urban industry may have this effect also, since it might substitute employment “with board” for employment “without board”; and many local products might be exchanged by being cleared on the books of the country storekeeper. This development, however, has not been of much importance since the introduction of the railway.
17 The circumstances antecedent to the financial disasters in Germany in the summer of 1931 were, of course, very complex. It was generally emphasized by observers, however, that cases such as that described in the text were important contributing factors.
18 The importance of “errors of optimism” and of pessimism is implied by this conception of money. Be it noticed incidentally that these may offer another example of interaction between subjective and objective factors, fortunate experience tending to create optimism and misfortune the reverse. Here again we obviously have to confront cases of cumulation.
