Knowledge that Transforms

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

LOOKING at the business cycle broadly, one of its prominent features is the revision and readjustment of operating expenses that it necessitates. In a period of prosperity, when selling prices are rising and the volume of sales increasing, wages, rents, and other items of expense almost inevitably tend to rise. In any one business some items of expense usually rise faster than selling prices, while other expenses lag behind. The normal relationship between industries and trades, which are buying each other's products or competing for raw materials, transportation space, labor, and credit, also is upset. The result is that eventually the balance between and prices is gravely disturbed. After the peak of prosperity is passed, sales slump, and a rapid drop in prices occurs in most industries. The falling off in revenue necessitates downward readjustment of operating expenses through curtailment of production, through the increased efficiency of employees, through the introduction of more economical methods of operation, or perhaps through actual reductions in wage rates, rents and other items of expense. Pending the outcome of such readjustments, the profits of the business are jeopardized; the degree of jeopardy is reflected, in the case of a large corporation, in the reluctance of investors to buy its securities. During the readjustments of the summer of I92I, for example, it is probable that the depression in security prices has been intensified, not only by foreign influences and by a lack of funds in the hands of investors, but also by the hesitation of investors to buy securities before there is evidence that operating expenses have been successfully brought into line with reduced income. During a period of recovery of business prosperity, such as we now seem to be facing, the normal balance between costs, prices, and profits tends to be gradually restored. The adjustments and readjustments of operating expenses suggested in this rough sketch are part and parcel of the business cycle. Data are not available to permit a close analysis of the processes by which the adjustments work out. Such data as have been collected, however, indicate that a thoroughgoingstudy of operating expenses with reference to the business cycle probably would reveal where maladjustments tend to occur and indicate the points that are most symptomatic of future conditions. The scattered data of this sort that are now available include those given in the Federal Trade Commission Report on the Leather and Shoe Indusstries, August 21, 1919, the report on the retail clothing trade 1 by the Bureau of Business Research, Northwestern University, and the bulletins on operating expenses in the retail shoe, grocery, hardware, and jewelry trades and in the wholesale grocery business by the Bureau of Business Research, Harvard University. In the report of the Federal Trade Commission, cost figures per pair are given for the 5 years i9i4-i8 for 76 grades and styles of shoes, including 25 of men's shoes, 40 of women's shoes, 4 of misses' shoes, and 7 of children's shoes. The cost figures, obtained from I3 factories, are classified into leather, materials other than leather, labor, and overhead. A brief examination of the figures for overhead indicates wide variations that probably were due to differences in accounting methods; consequently, overhead and total are not included in the following summary prepared from the report. For the purposes of this summary, the actual figures for each of the three items of cost and the selling price per pair have been converted into figures. The I9I4 figure in each case was used as the base; percentages were computed; and simple arithmetic averages of the percentages were taken as the relative costs for 76 styles in each year.

M ONTHLY index numbers of industrial stock prices for the period 1902-2I, computed by averaging the quotations for the common and the preferred shares of twenty manufacturing companies, are presented graphically in Chart I.' The two series of common and preferred stock indices exhibit marked cyclical fluctuations. These series agree in their indication of the dates at which the important upward and downward swings began, but as might be expected, the common stock index fluctuates much more violently than does the preferred. Looking at the curves of Chart I, we see that during the year 1902 the trend of the common stock index was slightly upward, while that of the preferred stock index was practically horizontal. Early in I903 both indices began a downward movement which lasted for about ten months. There was little recovery until the middle of the following year. Beginning with July I904 a sharp upward movement took place, reaching its highest point in January i906. There then followed in succession the bear market of i906-07 and the bull market of i908-09. Stock prices again declined in i9i0 and i9ii, but did not reach nearly so low a level as they had at the end of the two preceding slumps. The period I9I2-I4 was one in which fluctuations in security prices were much less violent than during the decade preceding; there was slight recovery in I9I2, followed by moderate decline during the two following years. The most noticeable feature of the period I9I5-i8 is the divergence which took place between the movements of the common and the preferred stock indices. During the war years the increased earning power of various industrial corporations reflected itself in the quotations of the common shares, and the common stock index rose until it reached figures considerably above the average for I902-I4; the preferred stocks, except for the relatively small number whose dividend-paying records had been poor during the pre-war period, benefited very much less from the increase of profits, and their prices, on the whole, showed comparatively little change from the pre-war level. Examining in greater detail the movements of the indices through the war period, we see that the year II4 closed with prices at a low level. During the first ten months of I9I5 both series showed a decided upward trend, but weakness then developed in the common stocks, while the preferred stock index moved horizontally. This continued until September i9i6, when both indices began a rapid advance. The recovery was short-lived, however, and prices fell throughout I917. From the end of I9I7 until the signing of the armistice the indices rose steadily.

T HE acute South American aspects of the present world-wide depression have raised in the minds of American exporters a number of anxious queries regarding the status of our European and other competitors in the southern markets. Doubts are being expressed as to our ability to retain those parts of British trade which we took over during the war. Fears are entertained as to Germany's recuperation in that region, and as to the intrusion of such newcomers as Japan, the Scandinavian countries, and even the larger Latin American republics which have begun to exploit each other's markets at a modest but steadily increasing rate. As a climax to the whole situation the premium on the dollar in each of the more important southern capitals has persisted at abnormally high figures, thus giving to European exporters an advantage which those in certain lines, such as ribbons, wire, and galvanized iron, have been recently capitalizing in considerable amounts. The problem of appraising the competitive possibilities of our more important rivals in South American trade involves of course a review of their commerce with that continent in the recent past as a partial basis for an identification of their fields of special interest and of our incursions into their markets. One other important factor which is being all too frequently ignored by many American exporters, is the transformation which the war has wrought in the import requirements of the southern markets. In spite of the radical economic changes in Europe and the United States since I9I4, many of the northern exporters from both sides of the Atlantic are returning to their South American markets with the expectation of finding buying conditions there very much as they were in I9I3. This assumption ignores entirely the present widespread determination in practically all of the South American countries to make permanent a considerable portion of their new war-born industries. Ample evidence of this intention can be found in the shape of readjusted protective tariff programs, corporation and income tax inducements, and active preparations for the exploitation of hitherto untouched hydroelectric power projects and petroleum fields. The effects of these new developments upon the commercial situation are already apparent, as will be indicated below; their most significant bearing is upon the relative standing of the various competitors who are now trying to secure or to retain footholds in those markets. That standing will be determined very largely by the agility and resourcefulness displayed by the rival merchants in anticipating and meeting these fundamental industrial changes in South America. Great Britain is obviously the most formidable of our competitors and the effects of any actual or potential industrial transformations in the southern republics upon her trade are therefore significant. The recent history of her important coal trade with Chile illustrates this point. The changing of the nitrate industry from a coal-burning to a petroleum-burning basis during the past six years has greatly reduced and will ultimately practically eliminate the importation into Chile of the commodity which had for many years before the war made up not less than 30 per cent and frequently more than 40 per cent of Britain's total exports to that country. Table I shows the decline of Chilean coal imports since I9I3 and the acquisition of a part of the British trade by the United States. The curtailment of

EVEN under normal conditions Italy must be rated a poor country. The endowment of natural resources is scanty, industrial development has been less marked than in any of the great powers, and the predominant occupation, agriculture, is carried on with comparative ineffectiveness. Italy's economic disabilities have been greatly increased as a result of the war by excessive straining of credit and inflation of the currency, depreciation of the lira, quintupling of prices, and labor troubles. Although, with the exception of the railroads, the physical equipment of Italian industry and agriculture has suffered little, it is evident that extraordinary energy, skill, and political daring will be necessary to effect even a slow recovery of economic order and stability. The extent to which Italy normally must depend upon foreign countries for essential basic materials appears from a comparison of merchandise imports and exports for the five years preceding the war.

T HE curves of our Index Chart for I903-I4 were obtained by sorting twelve statistical series into three groups of four each, and then averaging the series of each group. The criterion for sorting the series was statistical; that is, when corrected for seasonal influence and normal growth the series of each group moved in the same general direction (upward or downward) at the same time. The three groups, however, did not undulate simultaneously but moved in a well defined sequence. After the statistical analysis of the series had been completed, it was noticed that the series of each of the three groups possessed economic similarity as well as

I NDICES of the cost of constructing a standard reinforced concrete factory building, supplied by the Aberthaw Construction Company of Boston to the REVIEW, are shown in the accompanying table. The basic figure is the actual cost of construction of a sevenstory reinforced concrete factory building erected by the Aberthaw Company in I9I4. Estimates have been made of the cost of putting up the same building if construction were begun on January I, I920, July I, I920, and on the first of the month from January to October I92I. The index number for any given date is secured by expressing the estimated cost of construction, beginning on that date, as a percentage of the actual cost in I914. Although the indices are based on the estimated costs of constructing a selected type of building they show the fluctuation in costs of reinforced concrete construction in general. The building chosen as a base was actually constructed between August 22 and December 31 I9I4; building costs were so uniform during the year that it is accurate to consider the base to be the entire year. This b,uilding was chosen for two reasons. The building itself is typical of the reinforced concrete structures erected by the company, as is also the proportion of costs involved for the various classes of labor and various kinds of materials. In the second place, its construction was an almost ideally handled job ; that is, a job which involved no waste and no unusual costs. Consequently, actual and estimated costs correspond closely, both for the job as a whole, and for its component parts.