Knowledge that Transforms

IN no other country in the world is it possible to keep so closely in touch with current monetary developments as it is in the United States. The reports of the condition of the reserve banks and of the member banks furnish a fertile field of research for the economic statistician. Although much has been done in the interpretation of the forces at work in the banking system, it is safe to say that much remains to be done, and important additions to banking theory will arise from further study of the interactions within our complex financial mechanism. The statements for the member banks which report weekly furnish promptly available data for a group of banks with assets including about three-fifths of the total assets of all member banks. Since all member banks in turn comprise about 6o per cent of all banks in respect to total assets, it will be seen that reporting-memberbank figures are a 3 5-40 per cent sample of similar items for all banks. The reporting member banks are not a random sample, but their reports furnish a trustworthy picture of changes in the credit situation, and, since they are available weekly, have an obvious advantage over the reports for all member banks and for all banks. Although their movements should occasionally be checked against those of more comprehensive aggregates, one may depend upon reportingmember-bank data to furnish a good view of current developments in the credit situation. The solid lines on Charts i and 2 show total loans and investments of all member banks and of reporting member banks respectively for the period I922 to date, and it is apparent that the fluctuations are simi ar. For a measure of the amount of credit expansion in recent years it is possible to look either to the asset or to the liability side of the balance sheets which furnish our current banking statistics. Since reserves are computed as a percentage of deposits, it might seem more logical to look to deposits as an index of the degree of inflation in bank credit. The choice of loans and investments rather than of deposits can be defended practically by saying that after all it makes little difference. The two upper curves on Chart i support this conclusion. Thus, in the period under discussion the movements of total deposits of all member banks have been essentially similar to those for total loans and investments. A more pronounced seasonal movement in the deposits curve makes the resemblance somewhat less apparent than it otherwise would be. Hence, one objection to the use of deposits as a measure of credit expansion is that their significant movements are partly obscured by their

extent and direction of the month-to-month fluctuations were substantially accurate, the general level of the index was somewhat too low. The current revision was undertaken therefore in order to correct this discrepancy in level and, at the same time, to improve the several industry indexes. Chart i presents the revised mining index, monthly, for the period since August 1922, in comparison with the unrevised index which is shown for the interval since January 19I9. The tie-on between the old and the new index was made in August 1922, the closing month of the prolonged coal strike in the bituminous coal and anthracite fields. The two indexes were then practically coincident. The higher level of the revised index is accounted for in the main by revisions in the normal lines for output of anthracite and bituminous coal and for shipments of iron ore. The technique of the analysis has in general been similar to that of the revision of the index of the volume of manufacture which was discussed in detail in the May 1929 REVIEW. The revised index, like the old, is a weighted arithmetic average of relatives, the weights being based upon average values of the minerals over a period of years. The fuels and metals group indexes have been retained and are shown in graphic form on Chart 2. The fluctuations in the

W E are familiar with the grow-th of the volNIAurume of spec-ulation in recent years, the growth of brokers' loans, the gradual rise of interest rates, the attempt of the Reserve banks and Imember banks to check the absorption of credit, the successful appeal of the market for funds from outside the banks, and the increasing pressure of this dernand upon all the money markets of the world. We have noted also the resulting movemnent of gold to the United States $200,000,000 in the first nine months of this year; the action of Canada and Argentina, establishing embargoes upon the export of gold from those countries to the United States, although such action meant a partial abandonment of the gold standard; the a] arm in Europe over the rising value of gold; the general advance of discount rates in Europe, and finally the action of the Bank of England in raising its discount rate to the alarming figure of 61/ per cent, followed by the rapid withdrawal of European funds from New York, and the dramatic collapse of the stock market, with a shrinkage of $2,500,000,000 in stock exchange loans. An astonishing amount of reputable support was given to such ideas as that the Reserve authorities were paying too much attention to the market, that they had no supervisory powers over stock prices or brokers' loans, and that in defending their own reserves they were culpably making money tight. If the reserves had not thus been defended, what reason is there for thinking that they would not have been completely drawn into use, before the uttermost ends of the earth were ransacked. It is surprising that so many people should have forgotten the experience of the Reserve system in the crisis of I920-2I. The Reserve banks were forbidden to make loans for the purpose of buying stocks, bonds or other investment securities, excepting United States Government bonds. Under this exception they became the principal agency of the Treasury in financing its needs during the war, and when the war ended they were loaded to the guards with rediscounts secured by Liberty Bonds. Then came the great deflation of prices and credits, which was followed by a storm of criticism of the Reserve banks for their failure to render in that crisis the assistance that was expected of them. But how could they assist anybody? They were in the situation up to their necks themselves. The strength of a Reserve bank is in its reserves, and these institutions had no reserves. They were in the same condition as the other banks that were looking to them for help. They had nothing to put into the situation, but were under the necessity of collecting some of their outstanding credits before they could grant new ones. In view of this experience, so comparatively recent, what possible defence would have been available to the Reserve authorities if they had allowed Reserve credit to become an important factor in the increase of brokers' loans from $3,000,000,ooo to $8,500,000,000 in the last two and one half years, and how much worse might the situation have been in the last week of October if it had been known that the Reserve banks already had made use of their reserves? But while the case for the restrictive Reserve policy thus seems perfectly clear, nevertheless certain objections were raised which are entitled to further consideration. Membership in the World Association of Gold Standard Nations, although an informal relationship, implies certain mutual obligations. The monetary systems of all the member nations, their credit structures, the wage and price systems, the relations between debtors and creditors in short, all of the complicated relations of modern, highly organized, society are dependent upon the common gold basis. It is not an absolutely firm and immovable basis for any of them. In a sense it is a liquid basis, a movable, shifting basis. Gold distributes itself around the world in response to the demands for it, and under normal conditions it may be assumed that each country will get the share which corresponds to its participation in trade and will best maintain stability not only in international value relationships but in domestic value relationships as well. On the other hand, irregular and abnormal conditions anywhere affecting the international movements of gold may disturb the sensitive equilibrium

AT ninth annual conference of Harvard Committee on Economic Research held a year ago, it was pointed out by present writer that oil industry had been passing through era of unprecedented and even revolutionary advances in technology without corresponding progress in art of economic and conclusion was advanced that the petroleum industry in 1928 faces and will attempt to solve its greatest problem issue of economic The year of I928 has been characterized by two outstanding features: first, progress toward economic control within industry, which has taken form of partial rationalization of crude oil production in United States and of a trend toward cartelization abroad; and, second, a betterment in statistical position and price of gasoline, resulting in favorable profits for manufacturers and distributors of that commodity. The first development was outgrowth of necessity, and was brought about by planned control on part of industry, aided by state and federal authorities. The second development was primarily resultant of natural economic forces, though regarded in many quarters as also an outgrowth of control. These two developments should be plainly distinguished if a clear perception of current status of petroleum situation is to be gained. Nineteen hundred and twenty-eight was entered on a low and unprofitable price level, with a potential crude oil supply in sight that, if left to a normal development, would have greatly exceeded physical ability of industry to cope with output. In consequence, it became necessary to stem impending flood of oil, and steps were taken in menacing flush fields of Texas, Oklahoma, and California to retard production by cooperative methods of proration and drilling shut-downs. These efforts were initiated by operators themselves, but were subsequently stabilized by invoking authority of states involved through jurisdiction of Commissions charged with responsibility of conservation and prevention of waste. In this manner. rate of outDut of prolific pools of Permian Salt Basin in West Texas was curtailed to a small fraction of potentiality; drilling up of several pools in Seminole District in Oklahoma was staggered and spread out over year; and some production was shut-in in California. As a result, crude oil production was maintained at about 2,400,000 barrels per day for first 8 months of year and around 2,500,000 barrels per day since August, thus permitting demand to catch up with supply and bringing about statistical equilibrium. These results were not obtained without great effort and there were many set-backs and numerous local situations where efforts at control failed. Yet, by and large, it was demonstrated that at low prices crude oil supply could be regulated within certain limits. Coincident with these efforts to rationalize crude oil production in United States, progress in direction of improved economic control was witnessed in other directions, particularly in appearance of a trend toward cartelization of a group of foreign oil companies, organization of plans for formation of an American Export Association for cooperative handling of petroleum export business, and improvement in domestic trade practices in distribution of gasoline. Yet, in main, it was not from achievements in artificial economic control, as important as they seem, that financial betterment in I928 came to industry, but from an entirely different source operation of natural economic law in field of gasoline manufacture. Under influence of very low prices that prevailed for gasoline from early months of I927 until spring of I928, output of gasoline was curtailed and held at relatively low levels and, what is even more important, work on refinery expansion and cracking installations came almost to a standstill; and accordingly I928 gasoline season was entered with gasoline in a strong statistical position. This condition is indicated by fact that last March gasoline stocks were 23 per cent lower than twelve months previously and 79 per cent of co mputed normal,

IN order to forecast next year's income tax receipts it is necessary to determine the income of the current year upon which the tax is based. Since the latest data tabulated from income tax returns and published in Statistics of Income apply to income reported two years ago, the gap between recorded data and the present must be bridged by an estimate of last year's income. Analysis of the data published in Statistics of Income has resulted in a tentative method of forecasting the income that will be returned and published in the next two volumes of the Statistics of Income.' The various stages in the development of this method as applied to forecasting corporation income, both before and after the data in Table i (this REVIEW, vol. XI, pp. i8o-i) were derived, may profitably be described. At the outset, attempts were made to use independently such items as gross sales, miscellaneous income, cost of goods sold, and miscellaneous expenses. The ensuing analysis revealed many variations which could not be explained by economic changes, and which were traced and found to be due to changes in laws, methods of tabulation, and accounting practice. Therefore, items of expense or deductions, that might have been interchanged on account of any one or all of these causes and consequently show an inverse relationship, were combined into one group, and items displaying a similarity of movement were combined into another. The dominant characteristics of these resulting groups were those of fixed and variable (supplementary and prime) costs, and it appeared desirable to pursue the study according to such a classification although considerable overlapping existed due to the nature and number of separate items tabulated. A corresponding separation of income into fixed income and variable income cannot be satisfactorily obtained from the data. However, the separation of deductions into two such parts becomes a function of, or dependent on, the separation of income into corresponding parts, as well as on the weight or influence attributed to other unknown factors. Since complete separation of deductions into fixed and variable parts was not possible by direct use of the tabulated data, resort was had to trial and error experimentation to obtain an approximate division. It is fully appreciated that the results are tentative, that publishing detailed results without expressing all of the limitations and mental reservations which the authors have attached to the data and to the method is hazardous, and that as more data become available many of the present conclusions may be discarded. The method in its present stage of development consists of (i) forecasting gross income,2 (2) deducting therefrom an estimate of variable costs, (3) deducting similarly an estimate of fixed costs, and (4) obtaining a resultant estimate of net income. There follows a description of the analysis at two previous stages of development and an explanation of the more important intervening trials and errors. The first stage of development was reached before the data for I926 became available in I928. After discarding the separate items of income and deductions as rather meaningless, and recognizing the limitations of gross income data as published, but without attempting to make the necessary adjustments, an index of gross income was constructed and substituted in place of the tabulated gross income data. This index of gross income was constructed by combining several published index numbers and using constant *Continued from November, I929, issue. 1 Forecasts of prior year loss deductions from net income and of credit for size of net income also must be made in estimating net income subject to tax. Furthermore, the net income as tabulated in the Statistics of Income is not exactly the same as the income on which taxes are actually collected during a given period. For example, during the calendar year I927, some current taxes were collected on incomes tabulated in the I925, I926, and I927 Statistics of Income, owing to the method of tabulating fiscal year returns, and the legal provision for payment of taxes thereupon in quarterly installments, the first of which is due two and one-half months after the close of the fiscal year for which the return is made. 2 Gross income as adjusted and explained in the preceding article.

THESE notes supplement artides by the present writer in this REVIEW for August I92I and April I924, and bring up to date tables published in these numbers. Table i gives revised figures for the world's production of gold by regions from the high record of 19I5 to I925. The table covers a period of i i years during which the world has produced ?868,500,ooo of gold, of which ?407,000,000 or 47 per cent was contributed by the Transvaal. It is worth noting that of the ?4o80,000,000 which, according to the records, has been produced since I493, ?2,025,000,000 was contributed by the first quarter of the present century, and ?I,568,ooo,ooo by the nineteenth century. Another fact is significant: in i848-75, according to Edward Suess, 88 per cent of the output was derived from alluvial, while today the percentage has fallen to 8 per cent, and banket practically confined to the Rand yields 50 per cent. In reading Table i and the two which follow, it must be remembered that the Rand white miners' strike of January-March I922 reduced the output of that year by about ?6,ooo,ooo. If the strike had not occurred it is probable that the year of lowest production since I9I5 would have been I92I and not I922. One can, therefore, say that, partly as a result of exhaustion of mines, but also as a result of the increased cost of working resulting from the World War, the yearly production fell from ?96,400,000 to ?68,ooo,ooo, or to 70'2 per cent of I9I5, while it has since increased to ?8oooo,ooo, in I925 or 83 per cent of the high record set in I9I5. In I924 and again in I925, but only by a narrow margin the Transvaal set new high records, and Canada did also. Apart from these two, and probably Russia, the principal gold fields of the world were either stationary or declining, and there is distinct indication that, although the recovery in the world's production has probably not yet spent itself, any further advance will be on a more moderate scale than in recent years. As the Transvaal, especially the Rand, con-

F OLLOWING several years of relatively easy money, the year I928 was marked by a more vigorous upward movement of interest rates than any year since the post-war inflation period. The discount rates of the Federal Reserve Bank of New York and of a number of other reserve banks were raised three times in the course of the year, carrying these rates from 3'2 per cent at the beginning of the year to 5 per cent at the end. The relative levels of money rates at the two year-ends are shown in the following table: (Per Cctt)