Knowledge that Transforms

A MONG the evil legacies of the war is a serious derangement of the world's currency and banking. There has been general inflation of credit and currency. The world's banking reserves have been redistributed. In most countries bank loans, deposits, and circulation have increased out of proportion to gold and silver reserves, or in the face of declining reserves, and reserve ratios have accordingly fallen heavily. Several important countries have effectually departed from the gold standard and are experiencing the characteristic effects of an inconvertible currency regime. In no small measure as a result of these currency and banking influences, world prices have risen astonishingly; relations between price levels of different countries have been disrupted and continue unstable; and international exchange is utterly deranged and subject to extreme fluctuations. In turn, international trade and finance have become highly uncertain and speculative. During the war economic and financial policies were determined by military considerations and the probable effects were not always frankly faced. Now hostilities have ceased. It is pertinent to inquire not merely where we stand but whither we are going. How far did these war-time tendencies progress ? Are they continuing ? If not, have they been merely checked, or is good progress being made in regaining a normal status ? In what respect is the post-war normal to differ from the pre-war position ? These questions press for answer, the more because, through exchange rates and price changes, the currency and banking situation is intimately linked with all the problems of labor unrest, international trade, the financing of reconstruction, and the enforcement of the terms of peace. Statistics of central banks and of new government issues here afford valuable evidence. Hence in recent SUPPLEMENTS we have reviewed selected statistics of the Bank of France, the Bank of England, British currency notes, and the federal reserve banks. Here, more briefly, similar data are considered for other leading countries of the world, and tendencies during the war and since Armistice Day I9I8 are summarized. For such a survey recent issues of the Federal Reserve Bulletin contribute illuminating material,' and the weekly summaries of central bank statements published in the London Economist are invaluable. A preliminary word is needed, however, on the precise significance, in this connection, of these statistics of central banks.

Warren M. Persons, Pierson M. Tuttle, Edwin Frickey, Business and Financial Conditions Following the Civil War in the United States, The Review of Economics and Statistics, Vol. 2, Supplement 2 (Jul., 1920), pp. 5-21

A FULL explanation of the data and methods used A1 in constructing our index of general business conditions was given in THE REVIEW OF ECONOMIC STATISTICS for January and April i919. That explanation should be consulted by readers of the REViEw who want information concerning the technique or details of the construction of the index. The majority of readers, however, are interested in results rather than in methods or technical details. The explanation which follows is designed to meet the needs of such readers. Although the explanation is non-technical, it is nevertheless complete and it is intended to give a statement sufficient for an understanding of our index. Our index of general business conditions is derived from those series of monthly items of the industrial, commercial, and financial statistics which ordinarily serve as the basis for judgments concerning the fundamental speculative, business, and banking situation. Measurement of business activity, however, is relative to some standard. Isolated items of statistical series, upon which such a measure must be based, can have no significance by themselves. Only by a comparison of items over a period of time can we ascertain their meaning. Items pertaining to widely separated periods cannot, however, be used in their crude form. Each monthly item of bank clearings, pig-iron production, interest rates, and the like, is a composite, the make-up of which depends on the year and season. That is, various elements contribute to make bank clearings for January I920, for instance, the precise total reported. In general the actual items result from the combination of four elements -secular trend, seasonal variation, cyclical fluctuation, and a residual factor. The secular trend is the regular increase or decrease, according to some principle, over the whole period under consideration. For most series it is a growth element, dependent upon population and the development of industry. There is a normal change year after year in a developing or altering industrial society, just as there is a normal change in the physical or mental status of a growing child. As used in this exposition, the expression secular trend may refer either to a statistical series or to one item of a series. When it refers to a series it means the straight line fitted to the data; the measure of growth is given by the slope of the straight line. When the expression refers to one item of a series it designates the vertical distance (or its numerical value) from the curve or line of trend to the zero base line. The seasonal variation is the movement of the items within the year, which we attribute to the round of the seasons. There is a seasonal change in various lines of business activity just as there is a seasonal change in temperature or rainfall. Although an iron-clad system is not to be expected, the movement of the items, to be seasonal, must be systematic year after year. The seasonal variation of an item for any month is given by an index which expresses the normal for that month as a percentage of the monthly average for the year. The cycles are the undulating curves, or numerical values, secured by removing from the actual items the secular trend and the seasonal variation, and expressing the results in terms of comparable units.' The actual figures thus corrected and expressed measure the rhythmic movement of business, the ebb and flow corresponding to depression and prosperity. The residual element includes all sporadic developments which affect individual series, or widespread changes due to momentous occurrences, such as wars or national catastrophes, which affect a number of series simultaneously. Thus pig-iron production may take a sudden slump if a strike occurs, railway gross earnings may drop because of unusual storms or floods; trading on the stock exchange may be greatly affected by a court decision. The continuity of nearly all series was interrupted by the outbreak of the Great War. This irregular or residual element has not been eliminated by our process of correcting the data and hence it is present, along with the cyclical fluctuation, in the statistics used in constructing our Index. In order to adapt the statistical data to our purpose, the securing of a numerical measure of the ebb and flow of business, two problems were solved; first, we devised a method of correcting the statistics for secular trend and seasonal fluctuations; that is, we unraveled the tangle of elements which constitute the fluctuations in fundamental series. In other words, we devised a method whereby the actual series of business statistics now published in our trade and financial journals were set forth in such a form as to be significant and reliable indices of business conditions. Second, having corrected the various series of fundamental statistics for secular trend and seasonal variation, it was necessary to solve another statistical problem. The corrected series have wave movements; for all corrected series the elapsed periods from crest to crest or trough to trough are approximately the same. The times, however, at which crests or troughs of the waves of the several series occur are frequently not the same. Never-

IN the field of currency and banking the past six months have been a period of standing fast. Policies previously adopted have been on the whole maintained. Money rates have been firm on a high level in most countries, moderate or low in a few others. Recently a few increases have occurred. In central and eastern Europe inflation has continued rampant. In Belgium, Italy, and Spain there has been further currency expansion. Generally elsewhere, expansion has either slowed down, or contraction has begun to appear where, as in Japan and America, the business reaction has gone farthest. Restrictions on gold movements have not been modified, except to tighten them where, as in Spain and Argentina, the exchanges have moved strongly against a country and threatened to cause gold export. Gold movements have been of slight significance for currency purposes, chiefly swelling the reserves of the United States, Japan, and Argentina, which were already abundantly supplied. No obvious progress has been made toward solving the currency problems left by the war inconvertible paper, fluctuating price levels, dislocated exchanges. The critical related problems of increased production and normalized trade are equally unsolved. The turn of the year in most countries is a season of marked financial strain. This year it is complicated by the reaction in business which has now been in progress for several months almost throughout the world. Cuba and South American countries have experienced financial panics, such as Japan suffered last spring. Elsewhere the liquidation has been more orderly, though painful enough. Meanwhile, the serious damage to the world's economic machinery has not been made good: some parts have been replaced; Belgium has made good strides toward resuming normal activities; and France has accomplished some reconstruction; but in several lands the whole mechanism is rusting out or deteriorating further for lack of proper repairs and use. There have been good harvests; much quiet constructive work has been taking place; but, taking the world as a whole, it may be doubted whether the aggregate productive forces are more effective than they were a year ago. A turning point in a world cycle of prosperity and depression may have been reached last spring; a more fundamental turning point, from declining to increasing productivity, seems to lie ahead. Before I92I is far advanced new developments must be expected. World conditions are still fundamentally so abnormal that pre-war experience affords only moderate aid in forecasting these developments. Far more than before the war, they depend upon government policies, national and international action, and the judgment of men of finance upon measures which will best facilitate the essential readjustments. It is therefore pertinent to review an outstanding event of the autumn -the International Financial Conference which sat at Brussels from September 24 to October 8.1 Proposed last January in memorials submitted simultaneously to leading governments; approved by those governments with varying degrees of caution or enthusiasm; called by the Council of the League of Nations; successively postponed from May to July, and from July to September the Conference finally assembled, grappled seriously with the world's financial problems, and reached certain unanimous conclusions. Eighty-six delegates were present, representing 39 nations containing three-fourths of the world's population and including practically all the important countries except Russia, Turkey, Mexico, and Chile.2 The representatives were in the main leading bankers and treasury officials, who attended as experts and not as spokesmen of [existing] official policy. Invaluable preliminary spade work had been done by the Secretariat of the League of Nations, assisted by eminent economists, in providing statistical and other evidence, and economic analyses, bearing upon conditions and prospects. It was therefore a workable body, representative, able, informed. Despite considerable advance skepticism as to its potentialities, and a deal of sneering while it was in session, the Conference seems fully to have justified its existence, and to have made a genuine and considerable contribution toward solving theworld's economic riddle.