A LONG BUSINESS INDICATOR
THROUGHOUT this book the thesis has been developed that there is a special significance in the fact that security prices and the volume of new capital issues have turned downward shortly before the downturns of most business cycles, and that they have turned upward before the business upturns. The argument has been that the downturns of the security prices have created market conditions that were unfavorable for the sale of more capital issues, and that the upturns of the prices have restored favorable market conditions. These changes of direction in the trends of security prices and in the volumes of new capital issues have resulted in cyclical fluctuations in the amounts of new money flowing into corporate enterprises.
There is one simple test which should throw considerable light on the degree of regularity with which such changes of direction in the trends of security prices and of the volumes of capital issues have in fact preceded the downturns and the upturns of the business cycles. That test can be carried through by computing the data of a single line representing in the earlier years of the long period under review a smoothed average of the courses of the security prices, and for the years since the early 1860's a line representing a smoothed average of the security prices and of the capital issues.
Such a line has been constructed for the entire period of 108 years covered by the diagrams of this book. From 1831 through 1862 it is a simple unweighted average of the 12 months moving centered averages of the bond and stock prices. Beginning with 1863, when the data of the capital issues became available, it is an average of the three series, but no longer an unweighted average. The data of new issues are small in volume in the 1860's and 1870's,