Knowledge that Transforms

D URING I927 the petroleum industry added to storage approximately 64 million barrels of oil, representing an excess of supply over demand of 7 per cent. This marginal surplus caused a depreciation in gross income for the oil business in this country, as compared with I926, of upwards of $6oo,000,000, and has given the oil companies a year of lean to vanishing profits and, incidentally, something to think about. The primary cause of this striking decline in values was the competitive and uneconomic application in the Seminole field of Oklahoma of a brilliant and recently developed engineering tool the gas-air lift with the result that the rate of production was doubled or trebled, three or four years' normal output compressed into one year, and an indigestible surplus of gasolinerich crude oil thrown on the market. In retrospect, it is becoming apparent that this new engineering technique, designed to lower production costs and increase yields, was economically misapplied at a cost to the petroleum industry of over a half billion dollars. Someone has characterized this incident as the Seminole Follies. During the past 7 years, stocks of oil have expanded I98 per cent, from I96 million barrels at the close of I920 to 584 million barrels on December 31, I927. In fact, oil in storage has increased in volume every year since I9I8, with the exception of I926 when inventories were slightly reduced. Just as I927 was marked by the application of a new phase of production engineering, so the preceding years were characterized by two outstanding technological developments of far-reaching consequences: the perfection of the art of cracking, whereby gasoline can be manufactured cheaply from fuel oil; and the rapid development of the science of geology, facilitating the discovery of new oil pools and, more latterly through the growth of geophysical methods, permitting the location of hidden structures in advance of drilling. In reviewing the course of prices during this period, one is impressed by two characteristics of the petroleum price cycle: prices were laggard in declining whenever supply began to exceed demand, while quotations were quick to advance upon the slightest tendency of demand to outdistance supply, even though the latter change might be (as it often was) merely seasonal. Inherent in this price habit was a considerable element of speculation both in respect to crude oil inventories and oil shares. As a result of such price movements, the momentum of supply was subject to recurrent periods of stimulation, in the face of growing stocks and improving technology bearing upon supply. It has been said of this period that the industry gambled on an oil shortage and lost. It therefore appears that the petroleum industry has been passing through an era of unprecedented, and even revolutionary, advances in technology, without a corresponding progress in the art of economic control. The reasons for this lack of progress in economic prescience go back to a number of ideas that time has proven to be unsound: the illusion that the storing of crude oil is a profitable undertaking; the dogma that an oil lease under no circumstance should be permitted to suffer physical drainage; the idea that extremely high prices are just around the corner ready to compensate for all the competitive excesses of the moment in short, thinking based upon incorrect premises and giving rise, under competitive stress, to unsound business practices. The oil man has not yet learned to think in terms of dollars instead of barrels. A few examples of the lack of economic foresight may be adduced from current practices as symptomatic of the situation. Last summer an operator in West Texas acquired a vacancy permit on a strip of acreage 300 feet in width, crossing a major oil pool. A well was started, which in turn gave rise to nearly ioO wells, with the result that these wells, at the close of I927 were producing 5o,ooo barrels daily, largely going into steel storage constructed to receive it. No one familiar with costs and price trends can clearly foresee a price movement adequate to pay out the cost of producing and storing this oil. In July a discovery well was drilled in the

N the estimation of the General Price Level, or of all exchanges of goods, services and property, there are two modes of approach. The first is through the Equation of Exchange, or division of the total of payments by a measure of Trade. The second is an of the prices themselves, a weighted combination of all different types of series available. If we had astronomical knowledge of all business transactions in the country, in money, and at the same time a physical or volumetric index of everything exchanged, then we could calculate this General Price Level verv closely. Or if we had the final, or consumption of all goods and services of every sort, and the relative amount of each, we could achieve the same result. And this average price would be the reciprocal of the value of money or of the medium of exchange, that is, the true purchasing power of the dollar. So wide is the sampling of all these things now available, it is the writer's view that we have materials for the approximation of such a puice level, at least as reliable as any of our familiar indexes of commodity prices, cost of living, wages, rents, etc. But this is in part to suggest that these familiar indexes of daily use are scarcely the trustworthy and accurate instruments that they have come, in many minds, to be regarded; that in reality they are simply more or less useful approximations.

A,NALYSIS of business conditions in the I 2 federal reserve districts, as shown by the fluctuations in the volume of check payments (bank debits) since the beginning of I9I9, supports the following conclusions: (I) Business in the individual districts usually fluctuates in sympathy with that in the United States as a whole. There are no systematic differences in either the timing or nature of the business fluctuations among the various federal reserve (listricts, after due allowance has been made for varying seasonal movements and trends. Such differences as do appear are clearly less significant than the fundamental similarity in the broader movements. This condition is indicative of the close economic interrelationship of the several areas of our country. (2) Substantial improvement has been taking place in agricultural conditions in recent years. This is clearly reflected in the figures for the primarily agricultural districts, notably the Kansas City and Dallas districts. The sharpest recent movement is to be found in the Minneapolis district, where the marketing of a large spring wheat crop in I927 has been clearly reflected in the figures for debits. The Kansas City and Dallas districts exhibit a more steady gain, and have advanced materially above their I924 levels. (3) The recurrent brief periods of expansion, recession, and renewed expansion are less marked in bank debits than in basic production. This condition is explained by the fact that fluctuations in such production, while important, do not represent the movements of general business. Bank debits, on the other hand, constitute an extremely representative measure of the complex of activities included under the term general business. Production of consumption goods, wholesale and retail trade, construction of buildings and engineering projects, and agriculture these and all other forms of economic activity have a share in making up the total of check transactions. Thus, while production indexes have moved sharply during these intermediate movements, it seems probable that the narrower movements of total debits depict more accurately the course of general business over the past few years. Except in those districts which are primarily agricultural, the several districts contain such a diversity of economic interests that the volume of check transactions is relatively insensitive to changes in any one line of activity. There are, however, some instances (notably the Cleveland district, where the iron and steel trade is of such great importance) in which sharp changes in the pace of basic industry are reflected in the figures for debits. These conclusions are based upon adjusted relatives for bank debits which appear on Charts 3 and 5 and in Table 4. Conditions in the various federal reserve districts are discussed in the following sections and a map of the I2 districts appears on page I46. A full description of the actual data and the statistical methods employed in adjusting the figures for irregularities of the calendar, trend, and seasonal variation is given in the section on data and methods,

R ECENTLY we have made two important changes in the Index of General Business Conditions. These include: a revision, involving a change of one of the constituents, in Curve B; and a revision, involving a modification of the secular trend and standard unit for each constituent, in Curve A.1 Both of these changes have been occasioned by the extraordinarily vigorous, remarkably sustained and widely prevalent public participation in stock speculation. The change in Curve B, which is discussed first below, comprises merely a refinement, in the bank debits data, intended to eliminate from the curve some of the confusing effects of the speculative outburst. The change in the Curve A is much more radical; and, since it may cause difference of opinion, we shall seek to explain in considerable detail the justification and implications of our substitution of the new results for those heretofore used.

AT the request of the editor of this REVIEW I give in the following article a summary of my theory of economic crises and shall endeavor to indicate the statistical data that may serve for its verification.' My view that cyclical fluctuations in industry and trade with periodic economic crises are inevitable consequences of the process of accumulation of capital which accompanies the evolution of economic life. With the increase of population and the progress of civilization social consumption rises. A corresponding increase of social capital a necessary condition for the satisfaction of these increasing requirements of society. The accumulation of social capital effected by individuals by way of savings, which appear in two forms: the creation of means of production, as a source of income, and the acquisition of rights to existing sources of wealth. The first proceeding increases the social capital, the second affects only the distribution of existing social wealth. By the second method of exclusively private accumulation, one individual can increase his capital at the expense of the savings of other individuals; society, as a whole, can increase its capital only by way of the creation of new sources of production. On the social scale, the result of savings of the last klnd will consist in a corresponding proportion of the productive force of labor and of existing capital being allotted to the increase of new means of production at the expense of consumption goods. But experience shows that the tendency toward the accumulation of social capital, as a result of savings by individuals, always exceeds the tendency toward increased consumption; in other words, experience shows that the increase of demand for consumption goods has a tendency to grow slower than the accumulation of social capital and the production of these goods resulting from that accumulation. The cause of this phenomenon to be found in the fact, that savings by individuals are called forth not only by their desire to increase their consumption in the same proportion, but also by other motives, i.e., the desire to provide for old age or the future of the family, of creating favorable conditions for the development and display of personal faculties, which the possession of a large capital, especially in our days of democracy so much facilitates, the so widespread passion of accumulating for its own sake without any obvious object, as well as the acute competition between rival enterprises, where a large and increasing capital often an indispensable condition for the possibility of maintaining an established position. The tendendy toward an excessive accumulation still encouraged by the circumstance, that the development of requirements, as Malthus says, is a plant of slow growth, whereas the final value of the consumed goods falls with accelerated velocity as the quantity of these goods increases. This tendency toward an excessive accumulation must inevitably produce a tendency toward overcapitalization, that is, of supplying social economy with means of production surpassing the requirements of the growth of social demand. It must likewise inevitably lead to a tendency of overproduction, for the means of production in social economy, based on division of labor and on exchange, cannot fulfil their destination and yield profits unless they produce the goods they have been created for. And these products, surpassing the needs of their producers, not meeting a demand adequate to the circumstances under which their means of production have been I My theory of crises was set forth in my work, Wirtschaftskrisen und Uberkapitalisation, Munich I907, E. Reinhardt ed. Russian edition, Moscow I915. The French edition appeared under the title, Les crisese conomiques, Paris I922, M. Giard ed. See also my other work, Geschichte der Handelskrisen in England i640-I840, Munich I908, E. Reinhardt ed. The law of the variation of value was set forth more particularly in a special work, La loi de variation de la valeutr et les inouvements gcturautx des prix, Paris I927, M. Giard ed. The reader will notice the great resemblance of several points of my theory with the conceptions of A. Aftalion, recently summarized in this REVIEW. At this occasion it may be mentioned that my theory was fully set forth in the above cited German edition of my work, which appeared in October I907 (with the date of i908), consequently before the first work of A. Aftalion on the theory of economic crises, published in I909.