The term business cycle refers to periodic changes in the economy. After the indistrial revolution, the level of business activity in industrialized caoitalist economies have gone through periodic changes from high to low and back again. One reason for the enactment of the Federasl Reserve Act of 1913 was to moderate the ups and downs of the business cycle.

Although the timing of a business cycle is difficult to predict, most economists agree that the cycle has four phases, which are as follows:

(1) Prosperity,

(2) Liquidation, which is now usually termed a recession

(3) Depression,

(4) Recovery.

. These terms were originally used by the American economist Wesley Mitchell (1874-1048). Productivity, employment, wages, and profits increase during the phase of properity. As the upswing continues, production costs increase, shortages of raw materials develop, prices rise and consumers react to the rise in prices by buying less. Prices as a consequence decline and workers are laid off. The phase of liquidation or recession commerces, and business executives become pessimistic as prices and profits continue to decline, and factories are shut down and unemployment becomes widespread. The economy then enters into a depression. Economists may differ when a recession becomes a full-fleged depression. The United Statesd probably at the start of the year 2003 is in a depression. Recovery starts when there is an increase in consumer demand, the exhaustion of inventories, or government action to stimulate the economy.

The four phases vary considerably in severity and duration. Major cycles on the average have lasted slightly longer than eight years, while minor cycles have generally lasted from two to four years. The American economist Alvin Hanson (1887-1975} reached the conclusion that there was 10 major and 23 minolr cycles from 1857 to 1937. The most severe was the Great Depression in the United States during the 1930s.

Two suggested external causes for cycles include sunspots and economic trends. The sunspot theory of British economist William Jevons was at one time widely accepted. Jevons believed that sunspots affected meterological conditions which, in turn, affected the quantity and quality of harvested crops and thereby the economy. Under the psychological approach, British economist Arthur Pigou believed that the optimism or pessimism of business leaders may influence an economic trend. President Hoover during the early years of the Great Depression appeared publicly optimistic, hoping to stimulate the economy. The importance of optimism or pessimism is not that they may cause an economic trend but that they interfer with the harmonious working together of expansive-contractive patterns of forces, causing for example supply to get out of step with demand. In an economy of business leaders exercising realism business cycles as we know them would probably not exist.

The relationship betweeen investment and consumption affect business-cycle fluctuations. New investments have a multiplier effect,with investment money paid to wage earners and suppliers becoming inome to them and to others as the wage earners and suppliers spend their income. At the same time, an increasing level of income spent by consumers has an accelerating affect on investment. Higher demand necessarily leads to greater incentive by business men to increase investment in production. Under this analysis, the fluctuations, however, would be minor and would not explain the decline from prosperity to depression. Such a decline can only be explain by serious and major interference with expansive-contractive patterns of forces. Only excessive optimism or excessive pessimism, devoid of any bases in reality, along with the abuse of regulatory authority over the monetary system, can account for the extreme fluctation of the business cycle from prosperity to depression.

Since the Great Depression, the government has taken action to moderate severe economic declines. These actions have not been based upon a real understanding of the causal factors underlying severe declines but do make more tolerable the affect of the declines. For example, unemployment insurance provides most workers with income when they are laid off. Social security furnishes an increasing number of retired persons with at least some income. Government support of farm prices purportly help farmers from a disastrous loss of income. The stock market is now regulated by the Securities and Exchange Commission and by the Federal Reserve System purportly to prevent a recurrence of a financialy disastrous collapse such as that of 1929. The Fed, however, seems to be a major contributor to economic problems faced by the United States today and the SEC has taken no effectively action to stop the excesses of the stock mazket. If anthing, government actions have contributed to the failure to address the real causes underlying our monetary system and have allowed persons to become immensely rich during severe economic declines by getting assets ten cents on the dollar. The public remains ignorant while its leaders are representing not the public but those who gain from economic upheavals.

Along with the business cycle, special cycles may result from interferences peculiar to particular industries. The building industry apparently has cycles from 16 to 20 years in length. Prolonged slumps in the building industry added to the severity of two of the most severe American depressions, that from 1872 to 1873 and the Great Depression during the 1930s.

Some economists believe that a long-range cycle, lasting about fifty years, also occurs, and is established by a pattern in wholesale prices. From 1790 to the early 1800s wholesale prices rose, from about 1815 to the 1850s, wholesale prices decline , from 1850s to the mid-1860s, wholesale prices rose, from the mid-1860 into the 1890s, wholesale prices decline, thereafter wholesale prices rose until 1920, and thereafter fell until 1933.

Studies of economic trends were made during the same period by the Russian economist Nikolai Kondratieff. He analyzed economic quantities, such as wages, raws materials, production and consumption, exports, and imports in Great Britain and France. His data seemed to establish long-range cycles similar to those described above for wholesale prices; but his data are not conclusive. His "waves" of expansion-contraction fell into three periods, averaging 50 years each, 1792-1850, 1850-96,and 1896-1940.<

To understand the American economy, a person not only should have a sound understanding of economics as a social scoence but also a detailed understanding of the American monetary system and the American Federal Reserve System. With such an understanding, a person would probably realize that the United States could issue fiat money without the need of becoming indebted to the banking industry and the unnecessary accumulation of a large national debt. The important thing is that fiat money is created pursuant to rational and highly controlled regulatory procedures. A person also needs to understand the difference between budgeted and non-budgeted revenues and expenditures of the government and of government agencies. He needs to become adapt at analyzing the Comprehensive Annual Financial Reports of government entities for the reason that these CAFRs are usually completely ignored by even the financial press.

©Wilson Ogg