THE MONETARY MECHANISM OF CYCLES
DESPITE the adverse conclusion reached in Chapter XII about purely monetary theories of cycles, there appears to be much illuminating material to be gained from further study of the banking figures. Cyclical changes within the banks appear to have been for many decades the controlling factors in determining changes in short-term interest rates. Cyclical changes in the direction of movement of short-term interest rates seem to have resulted in changes in the courses of security prices. These changes from advancing trends to declining trends, and back again, for bond and stock prices have resulted in creating market conditions that were alternately favorable and unfavorable for the floating of new security issues.
We may well start on an examination of these matters by considering cyclical changes in the deposits and in the loans and investments of all National Banks. Diagram 18 on page 135 shows in its upper part the familiar black silhouette of three typical cycles of business activity during a 10 year period. The solid line in the lower portion shows typical cycles of the deposits of National Banks, and the dashed line represents the typical cycles of loans and investments in the same institutions.
The typical cycles of deposits and of loans and investments were made by finding the percentage deviations at call dates of the deposits and of the combined loans and investments from their 17 place centered moving averages. Figures for the months between call dates were then supplied by straight-line interpolation, and 12 months centered moving averages of these completed series were then computed. The data for the seven full cycles L, M, N, Q, R, S, and T were then combined, first by adding them with their down-