Business Cycles

In Indianapolis, as elsewhere, business cycles stem from economic shocks. In the 19th century, monetary panics begun by failures in the banking system gave rise to economic downturns. In the 20th century, oil price fluctuations contributed to instability. An issue during both centuries was the role of government as a promoter of economic development through its regulatory powers and as an employer of last resort in the face of economic downturns. Indianapolis was fortunate to have a diversified industrial base that reduced the instability arising from national business cycles.

In the 19th century, insufficient financial capital for Indiana’s growing economy led to state legislation in 1852 establishing the free banking system. The law made it easier to establish a bank through lower capitalization and reserve requirements. Consequently, banks were rapidly established in Indianapolis and elsewhere and issued their own paper money. An oversupply of this paper currency soon depreciated the value of the money and caused runs on the banks which, in turn, reduced their ability to lend and thus contracted economic activity. The national Panic of 1857 further undermined the Indianapolis economy by eliminating even more free banks.

Following the Civil War, a boom in real estate encouraged a cycle of speculation and debt accumulation. Real estate values increased faster than the family incomes required to manage these debts. The result was a collapse of the speculative bubble in the nationwide Panic of 1873, the beginning of a six-year-long depression. In Indianapolis, some banks closed while others restricted withdrawals. Although a group of manufacturers urged firms to maintain payrolls and wage levels, individual firms ignored the plea and laid off workers. The city and county government was called upon to become an employer of last resort, which it did by hiring men to work on the streets and roads. Controversy over the role of government in the economy was evidenced by a local newspaper that criticized a measure calling for direct relief as “wrong in principle and demoralizing in practice.” The city council passed the measure despite the paper’s opposition.

During the Great Depression, personal income in the Great Lakes region declined more than in the nation as a whole. The declines focused on manufacturing and construction. During World War II, Great Lakes and Indianapolis manufacturing was stimulated by the conversion of automobile, machinery, and primary and fabricated metals industries to military durable goods production. Because there was no production of consumer durables such as appliances during the war, Great Lakes manufacturing benefited after the war from pent-up demand.

The recessions of 1953-1954 and 1957-1958 slowed personal income growth, with weakness focused in manufacturing. During the 1950s earnings from Indianapolis manufacturing reached their largest share of total earnings. In the four national business cycles between 1948 and 1970, Indiana ranked second behind Michigan in having the greatest sensitivity to the national business cycle. The reason was the concentration in durable goods manufacturing, such as automobile parts, machinery and steel, in both states.

Indianapolis has been well represented in durable goods manufacturing by companies such as Allison Gas Turbine, Allison Transmission, Western Electric, Ford, General Motors, and Chrysler. A leading indicator of local economic activity has been the number of hours worked in durable goods manufacturing firms and the number of new unemployment insurance claims. If economic activity slows, the first place to indicate the slowdown has been these labor market measures.

In the back-to-back national recessions of 1980 and 1981-1982, Indianapolis’ manufacturing firms, like their national counterparts, attempted to change their way of doing business and be more competitive in the emerging global economy primarily by cutting costs. Coming out of the 1980-1982 recession, Indianapolis did not regain its pre-1980 proportion of employment in manufacturing because of plant closures, reductions in size, and the substitution of electronically based machinery for employees. The occupations especially hard hit were machine operators, assemblers, and craftsworkers. These high-wage jobs provided the economic strength for many Indianapolis families. In the 1990-1991 recession, manufacturing did not contract as in prior recessions because of changes made earlier in production methods, better inventory control, and the growing importance of demand for exports produced by Indianapolis firms.

One consequence of the long-term employment shift out of agriculture and manufacturing and into services was that local recessions became shorter and less frequent because the production of services was less volatile than the production of agricultural and manufactured goods. Services employment, however, was not immune to the business cycle. The two primary components of services are health and business services. As a primary health care center, Indianapolis employment in health care increased and showed only slowed rates of increase during economic slowdowns. Business services consisted of a range of activities, including temporary help agencies, computer programming, leasing, janitorial services, and management consulting. During recessions, firms tended to cut back on temporary help.

Another factor contributing to shorter and less frequent local recessions was the changing composition of personal income. Income support payments, such as unemployment insurance, welfare payments, and bank deposit insurance plans were developed to support business and consumer confidence during recessions. In 1929, “transfer payments” like these represented 2.2 percent of Indianapolis’ personal income. As Social Security benefits increased, transfer payments in 1982, a year of recession, had risen to 14.3 percent of personal income.

Indianapolis had developed a very diversified mix of industries. This characteristic moderates the influence of a national recession on the local economy as compared to the rest of Indiana. As a consequence of its diversification, and therefore its relative stability, the city of Indianapolis enjoyed a AAA bond rating for much of the 1980s.

As the capital city Indianapolis had a concentration of government employment, a circumstance which, at times, shields the local economy from severe recessions. Some people argue that the business cycle is the result of the failure of the market to adjust, and they call upon the government to intervene in the market to reduce cyclical fluctuations. Others support a laissez-faire approach, believing that government should stay out of the market economy. During the recession of 1973-1975, government employment increased during the recession and, therefore, was countercyclical. During the 1980-1982 recession, however, government employment declined. Indiana state government, through the establishment of a “rainy day” fund, has assumed some responsibility for stabilizing Hoosier economics when the national economy contracts severely.

*Note: This entry is from the original print edition of the Encyclopedia of Indianapolis (1994). We are currently seeking an individual with knowledge of this topic to update this entry.