T HE first quarter of I92I was marked by continued liquidation which brought, week after week, new evidences of trade depression which attained a scope and reached a depth well calculated to produce dismay and profound pessimism. Industries which had been slightly affected until the turn of the year began to encounter a slackening of demand. The prices of a few basic products, already depressed, fell to levels lower than those obtaining in I9I4, and the trend of wholesale prices continued to be sharply downward. The European outlook remained dark; the trade of the world seemed dislocated beyond the hope of immediate remedy; and, in this country, the financial embarrassments of our railroads forced themselves sharply into the foreground at a most inconvenient juncture. Upon the surface the developments of the quarter brought little reassurance and impressed upon many persons the conviction that a long period of hard times lies ahead of the entire world. Yet it is probable that, in spite of all the discouraging developments, the first three months of I92I saw, in the United States at least, the first evidences of a turn in the tide. Liquidation never proceeds with even step in all industries, and the first signs of industrial revival always come when the tide seems to be running strongly outward. Retail trade, which had suffered less than might have been expected, began to register a definite improvement with the first of the year and continued to move in a volume which was bound to lead presently to an increased, though conservative, demand for manufactured goods. Basic materials continued to feel the depression which has gripped the world markets upon which they depend, but various lines of manufacture, notably textiles, which had adjusted themselves to the inevitable, began to recover from the profound depression of last December. 'The improvement in such lines was gradual and halting. January showed an increased demand which indicated that the previous deadlock had been broken; February brought hesitation and a fear that the improvement of the previous month was a mere flash in the pan. In March the trend was again upward but with renewed signs of hesitation at the end of the month which again produced gloomy forebodings. April has shown that these forebodings were not justified, and has brought definite evidence of improvement in the automobile and some other industries so that, at the time of writing, there is ground for believing that in lines of business that depend chiefly upon domestic demand the tide has definitely turned. General conditions, of course, are still decidedly spotty. Bank clearings outside New York City registered a considerable increase in March, but freight tonnage has not yet begun to improve. Unemployment has perhaps passed the peak, but many industries are still operating at a small percentage of their capacity. Such increases as have occurred in the volume of business have frequently been made at the expense of profits. But movement had to come first; and if it continues, profits will presently follow. Business is still depressed, but there have been encouraging developments since the first of the year which indicate that the end of the present movement of liquidation is in sight. The most uinsatisfactory conditions are found in industries which are largely dependent upon foreign demand and those in which liquidation, either through choice or necessity, has been deferred. Staple agricultural products and such metals as copper are probably in the worst case, and it is hard to see how improvement can occur until there is a considerable increase of foreign demand. In these lines production had been stimulated during the war, and the decline of export trade has had most serious consequences.Better provisions for financing foreign trade will, undoubtedly, help the situation, but readjustment cannot be complete until political and economic stability are restored in Europe and the trade of the world returns to a normal basis. Deferred liquidation accounts largely for the unsatisfactory conditions prevailing in the iron and steel and the construction industries. The recent revisions of the Steel Corporation's prices, if they are adequate to the requirements of the situation, will presently bring an increase of activity; but they seem to leave prices somewhat out of line with the levels reached in other lines of manufacture and create the expectation that further reductions accompanied by cuts in wages are still to come. In the construction industry prices of some materials have receded slowly; and while labor has become more efficient, labor costs still remain high. The level of construction costs is probably too high to encourage operations that can be deferred, so that this industry cannot be said to have readjusted itself to the conditions that will have to be met. Since the first of April there have been further recessions in the prices of certain materials and the liquidation of labor has made some headway, so that the present outlook is more encouraging than at any time since it became evident that capital will not take further risks with the high construction costs that resulted from the war. Retail prices continue to recede, but at a slower rate than wholesale. This has led to complaint in various quarters and to the suspicion that what is called profiteering still continues. It has to be borne in mind, however, that the war has increased the cost of retail distribution. Rents are higher, and wages and salaries will probably remain upon a higher level than prevailed in 1914. Readjustment of retail prices is under way, [83]J

T HE year following the armistice was devoted mainly to readjusting productive industry from a war to a peace basis. This required many changes in the direction of production and the return of several million soldiers to the pursuits of civil life. The process was not easy; but, after an initial period of depression, it was accomplished without serious disturbance, and a year ago there was every reason to be satisfied with the achievement. Normal conditions had by no means been restored, and it was clear that years must elapse before the world could liquidate all the accounts left by the great war. But it was a great gain and the first indispensable step in the return to normal life that the army had been demobilized and production readjusted from a war to a peace basis. The work accomplished in i919 had been greatly facilitated by several developments which were bound to occasion difficulty in I920. The export trade of the country, which had greatly increased during the war, instead of declining proceeded to rise to new high levels, thereby continuing the stimulus which American business had been receiving ever since I9I5. Added to this was the stimulus to active trade caused by the extravagant expenditures, both public and private, which had developed to a considerable degree during the war and acquired increased impetus with the return of peace. To finance foreign and domestic business and provide for the continuing abnormal requirements of the government, credit expansion had continued during i919, and prices were mounting to a higher level than had been reached during the war. It was clear that the United States, like the rest of the world, was caught in the toils of a new inflationary movement, which would ultimately lead to a reaction, the time and severity of which were impossible to estimate. To the year I920, therefore, the year i919 bequeathed a high and unstable price level, an unbalanced foreign trade situation, and growing money strain, which were bound to prove serious liabilities. Although readjustment of discount rates had been inaugurated by the federal reserve banks in November, i919 and liquidation in security markets had already set in, the year I920 opened with very active trade and increasing commodity prices. The early months were marked by great apparent prosperity, and many new records were scored in various lines of production and trade. But the prosperity was largely artificial and was approaching its end. Our foreign trade was unbalanced, and the burden of financing it was falling more and more upon the banks -a situation which could not continue indefinitely. Money rates were rising, and there was every evidence of increasing credit stringency. Liquidation in security markets continued apace, but was inadequate, as it always had been, to relieve the situation; all the conditions spelled liquidation in commodity markets as forecasted in December, i919 by our Index of Business Conditions. But, as always, only the discerning few realized what was impending; and even when liquidation finally began, many failed to realize its import. In the late spring the tide turned, and by summer liquidation of commodity markets was fairly under way. As it continued, the movement gathered force, and finally proceeded at an unprecedented rate. Although the REVIEW OF ECONOMIC STATISTICS had for months forecasted a reversal of business conditions, the editors had not expected a reaction of such acute severity. We had looked for a return to some such level as had prevailed in the few months following the armistice, and as late as July expected nothing so drastic as the events of the last half year. There were various reasons, not worth recounting now, which had seemed to justify the belief that in most lines of industry readjustment would come more gradually. But, as so often happens, when the turn came one untoward development followed another with the result that reaction was swift, intense, and world-wide. Surveying the year in retrospect, which is so much simpler than prospect, it is easy to trace the general course of events. By the spring of I920 consumers began to react somewhat violently against the continued increase of prices which had reached inordinate levels in many lines. It now appears that at the peak of wholesale prices retailers were, in many cases, unable to pass the entire load along to their customers. Some of them, foreseeing this, had already begun to buy very conservatively; and others, learning by experience, pursued thenceforth a conservative buying policy. The revolt of the consumer was natural and even inevitable, but it was intensified by the fact that he had been looking forward to relief from the burden of war prices and, therefore, resented more keenly the great increase which occurred between the spring of i919 and the spring of I920. Since purchasing power was not yet impaired, retail trade continued upon a fairly high level, but buying had become conservative; and this reacted upon the wholesaler, the manufacturer, and the producer of materials. Just when these developments were becoming serious the country ran into critical difficulties in transportation. The movement of freight was slowed down greatly during the early summer, and this retarded the circulation of goods and prevented liquidation of credits. In the agricultural sections a considerable part of the crops

T HE third quarter of the year probably witnessed the beginning of a slow recovery of industry from the depression which commenced in the late spring of I920. The dullness natural to the summer months obscured the trend of events, and belated liquidation in certain industries which had been slow to readjust themselves added to the perplexities of a trying situation. Looked at from one point of view, business never was worse. It was in a state of comparative prostration after a shock of unprecedented severity. In a few industries there was a fair degree of activity, but in the larger number production had been curtailed or even suspended; and it was evident that there was no immediate prospect of radical improvement. Financial sentiment continued generally pessimistic, in large part because the time had come for reckoning the losses which banks had suffered and for rehabilitating a few institutions which had been most severely hit. There was apparently little reason for optimism among investment committees, and there were many reasons for gloomy estimates of current conditions. It was indeed dangerous to -suggest that business ever could or would be any better. But while pessimism continued rampant, wholesale commodity pric,es, both in the United States and in the leading European countries, had rebounded from the low points reached in the late spring, giving evidence that the precipitate decline had come to an end. In August came the first indication of improvement in the iron and steel industry, when the output of pig iron increased io per cent over the figures for the previous month, a change which was presently followed by similar upward turns in other branches of the trade. More spectacular was the sharp rise in the price of cotton, which between July 30 and September i advanced from I2.I to I7.5 cents per pound. By September there was sufficient visible improvement in a majority of industries to bring about an upward turn in most of the indices of business conditions, including the statistics relating to employment. Whether the change was more than the seasonal increase of business activity, which apparently had begun in August, is not clear at the time of writing. Curve B of our index chart shows, after being corrected for the seasonal factor, a slight upward movement but not enough to justify a very optimistic forecast. The most that can be said is that business is slowly rising out of the trough of industrial depression and will probably continue to show a gradual improvement unless further untoward developments occur. But improvement~ does not mean that conditions have been or are now good. When the patient has been very sick, one can pronounce him better when he could not possibly call his health good. Copper mining is practically suspended; in many factories not a wheel is

Charles J. Bullock, John H. Williams, Rufus S. Tucker, II. The History of our Foreign Trade Balance During the Great War, The Review of Economics and Statistics, Vol. 1, No. 3 (Jul., 1919), pp. 234-252