Knowledge that Transforms

to a movement of five points in a high-priced stock as to a five point change in one selling at a low figure, more serious error tends to creep into the picture whenever some of the companies whose stocks are used as a basis for calculating the average price level issue rights to subscribe to additional stock or declare stock dividends, either in terms of their own shares or through the distribution of shares in subsidiary companies. Any change in the character of the equities represented, affects the validity of charts based on the average market quotations of a list of stocks. Those whose concern it is to protect investments in common stocks, need some more reliable measure of changes in the value of common stock equities, and it was with the purpose of establishing such a measure that the present studies were undertaken. As a result of

T HE index numbers of prices here presented in monthly form for the period I795 to I824 were constructed as a part of a study of the financial history of the United States during and immediately following the War of i8I2.1 To students of international trade, government finance, and money, banking, and prices, the developments of a hundred years ago are of interest because of the similarity between that period and the recent war and post-war period. It is hoped that the index numbers of commodity prices at wholesale may be of service to students of the history of these years. Such series provide a continuous record around which non-quantitative data may be organized, and, being sensitive barometers of economic life, they enable us to say something concerning the timing and the magnitude of the effect of the forces at work. A description of the construction of the indexes of prices in the United States from I795 to I824 is given in Part I below. Three indexes of prices in the Boston marketone of the prices of domestically produced goods, one of imported goods, and one of domes'tically produced and imported goods (the all commodities index) have been computed by months for the 30 years. In this section also indexes of prices of domestic goods quoted in the markets of New York, Philadelphia and Baltimore, from i8io to I8I9, are presented. In Part II the index numbers for the years i802-2o,have been examined to find out when business recessions and crises occurred, and some non-statistical material has been quoted which helps to explain the movements of prices in this period. Our conclusions concerning the causes of fluctuations in prices must necessarily be tentative, for the data upon which our judgment must be based are fragmentary.

THE accompanying chart presents a bimonthly index of general business conditions for the period I875-I9I3 consisting of three curves representing, respectively, speculation, business, and money (Chart i of the insert).' For the interval I903-I3 the index is that published in this REVIEW in January I924.2 For the interval I875-I902 the index is here published for the first time. The purpose of the present article is to describe the method of construction of the index for the earlier period, to discuss the relations existing between the fluctuations of its constituents compared with the relations found to exist between the curves for the i i years immediately preceding the war, and to make a brief survey of the period I875-I902 in the light of the new index. This index, like the one for I903-I3, is based upon corrected statistics. That is to say, the constituent statistical series of the three curves of the index of general business conditions have been adjusted for secular trend and seasonal variation. The following discussion relates to the fluctuations of the adjusted and not the actual series, unless otherwise specified.

T HE methods followed in the original construction of our index of business conditions were fully set forth in this REVIEW for April I919; and such changes as have been found necessary since I919 have been explained, as occasion offered, in subsequent numbers. Our methods of interpreting the index have never been presented so exhaustively', because in part they have developed out of our experience in handling current data and have been presented only in our Weekly Letters as occasion required. It has therefore happened that our interpretation of the index has not always been fully understood; and misunderstanding is easy unless any particular passage is interpreted not only with reference to its immediate context but also with reference to what has gone before. present article is devoted partly to various matters concerning which we sometimes receive inquiries, and partly to certain criticisms which have been offered recently, particularly those of Mr. Karl G. Karsten in his paper on The Harvard Business Indexes -A New Interpretation in the Journal of the American Statistical Association for December I926.

THE comprehensive and representative character of bank debits -bank clearings, before the commencement of reports for debits as a measure of business volumes is becoming more fully recognized with accumulating experience. There is, to be sure, some difference of opinion concerning the adequacy of debits as a measure of the physical volume of business.' Concerning the fitness of debits as a measure of the money volume of business, however, there is no considerable controversy; and the doctrine that debits furnishes the best single measure of the aggregate value of business transactions lacks little of being fully established. Moreover, it is now generally held that the fluctuations of debits in New York City reflect speculative movements in addition to business variations; and it is therefore customary to use debits New York City as more truly indicating the business transactions incident to industrial and commercial operations. That some portion of the variation in cities outside New York is speculative cannot be doubted, and that a large part of the variation in New York City arises from purely business transactions is also evident. The effect of speculative operations on outside debits is less clearly apparent than in New York, however, and a record of such debits may be accepted as a general measure of business activity. With the growing emphasis, in the study of business conditions, upon prompt information concerning brief developments, it becomes desirable to trace weekly figures for outside bank debits. The interpretation of such figures, with a view to appraising current tendencies within a particular phase of the business cycle, encounters serious obstacles. These obstacles are not identical with those which impede the use of aggregate monthly bank debits.2 For monthly data, the principal difficulties include: the making of allowances for holidays, the adjustment of figures for months having five Sundays, and the allocating of weeks which extend from one month into the following. Of these, only the first is of consequence in the study of weekly data: the irregular number of reporting days per week due to the very existence of holidays, the lack of uniformity in the observance of holidays in different cities, the uncertain effect on business volumes (both as respects extent and timing) of the observance of holidays, and the possibility that a particular holiday may at times fall within the same week as some other date (such as the first of the month) having a peculiar effect upon debits all these facts help to explain the effect of holidays upon the weekly figures. There are difficulties met with in the analysis of weekly data not encountered at least directly in the study of monthly aggregates. Chief of these arises in the custom for certain payments to be made on or about particular days of each month, with the result that there are considerable temporary expansions and contractions in debits at more or less regular times within the month. The fact that a particular day of the month does not fall on the same day of the week in each of several years implies an annual shifting of the weekly manifestations of these expansions and contractions. The effect upon the actual weekly figures for debits is most perplexing. It should be noted, moreover, that this intramonthly variation is not uniform for the twelve months of the year. In one month it is relatively intense, in another relatively slight; and this lack of uniformity is emphasized by the existence of certain large-scale financial transactions which distort the debits figures in particular months of each year. A further special difficulty encountered in the analysis of weekly data is due to the very detail sought in the weekly picture. The monthly aggregate marking the peak whether cyclical or seasonal in debits does not disclose the location of the peak within that month. This location becomes of moment in the study of weekly series; and the possibility that the peak effect as a whole is distributed, in unknown and perhaps unknowable proportion, between two adjacent weeks constitutes a serious obstacle in the analysis. 1 See Carl Snyder, this REVIEW, October I924, p. 256, and April I926, p, 85, for presentation of the case for the deflation of debits in order to measure physical volumes of business. 2 See this REVIEW, April 1926, p. 66.

STUDIES that have been made of land sales by the national government in the pre-Civil War period -among others those of Donaldson, Treat, and most recently Hibbard have presented the general course of the movement. Such statistics as these writers have advanced indicate that there were three occasions when the volume of sales reached particularly great heights. These occasions were the years preceding the crises of I8I9, I837, and I857. At these several times, speculation was rampant and the rush of purchasers to the local governmental agencies was so great that feverish activity of any sort came thereafter to be commonly described as doing a land-office business. But these accounts of land sales fail in several respects to give as full a picture of this important phenomenon as could be wished. Based on annual data, they do not show the timing of the speculative movements with a closeness desirable for the study of business cycles. As the course of commodity prices and other statistical series has been exhibited, or will shortly be exhibited, upon a monthly basis, there is reason for wishing the course of this speculative series of land sales to be available upon at least a quarterly basis.2 Secondly, since previous studies have presented data only for the country as a whole, little is definitely known as to the course of sales in the several sections of the country, especially as to the particular areas in the nation most affected at the different periods of speculative buying. Fortunately there exists in the records of the General Land Office material which makes possible a thorough study. The books of this Office give data by quarterly periods of the moneys received and deposited in the Treasury by the numerous local land offices, as shown by accounts submitted by such periods to the General Land Office in Washington. These data extend as far back as i8oi, but before i8i6 they are not full enough for our purpose except for particular areas since the reports do not become regular by quarters until this later date. However, covering the 45-year interval i8i6-6o, they embrace the occasions of the chief speculative activities, as far as land sales are concerned, and, indeed, the important periods of general speculative activity in the decades before the Civil War. Moreover, these financial items can be supplemented and tested by statistics of the quantity of land sold appearing in the annual reports of the Commissioner. These data also apply to the several land offices and are presented first I820 to i845 as single annual data, but later after i845 by half-yearly periods. By means of these two sets of figures, one can ascertain not only the significance in money terms of total land sales by the relatively short periods of quarter-years, but also receipts by each land office for similarly brief periods and the acreage sold office by office each year or half-year. For the interpretation of cyclical movements in the sale of public lands and for the determination of the sectional variation in these sales, such detailed statistics are invaluable. In the analysis here made of the new data, some simplification of the material has been thought advantageous, and this has been accomplished by grouping together the statistics relating to the land offices located in each of the several states, and by employing only the summations of moneys received or acreage sold in each group of offices for the various time periods. Since the boundaries of land districts (over each of which a single land office had control) usually did not extend over state lines, this method of operation serves merely to divide the country

My principal thesis is that the chief responsibility for cyclical fluctuations should be assigned to one of the characteristics of modern industrial technique, namely, the long period required for the of fixed capital. To the consumer the value of goods purchased depends on the satisfaction which he expects to receive from them. To the producer the value of materials depends on the price which he expects to obtain for them upon resale after transformation, that is to say, the value depends on his forecast of future prices. My theory implies that the expectations of those directing are alternately too optimistic and too pessimistic, a feature which it has in common with other theories. My theory differs from other theories, however, in the explanation given of the rhythm in the forecasts of business men. It does not appear that business men are, necessarily, consistently optimistic for several years and consistently pessimistic during other years. The rhythm in expectations results from the capitalistic technique of production, the necessity to, satisfy the needs of production, of an industrial equipment requiring a long time for its construction. In other words, the rhythm is a consequence of the long delay which often separates the moment when the of goods is decided upon and a forecast is made from the moment when the manufacture is terminated, and the forecast is replaced by reality. A time comes, at the end of a period of depression, when stocks of goods are greatly diminished and a shortage of certain classes of goods is observed. The particular classes of goods affected by this shortage, however, vary from one cycle to another. Let us classify goods, as is often done, according as the successive stages of transformation are farther and farther removed from the stage of final consumption and designate the classes as the first, second, third, fourth, fifth, sixth and so on. Experience shows that the goods of the first class, sold at retail to the consumer, do not appear to be among those in which cyclical movements originate. Let us suppose, for example, that the movement starts with goods of the third class, and that it is in this class that the insufficiency of merchandise and the exhaustion of stocks are observed. The prices of these goods may not increase. But merchants begin to buy them in greater quantity to restock their stores, and producers begin to order the products necessary for their manufacture, that is, goods of the fourth or fifth class. The prices of goods in these last classes may be the first to rise. There are products, notably raw materials, sold in highly centralized markets, the prices of which are very sensitive and vary with much greater rapidity than do those of the semi-manufactured and finished goods in the manufacture of which they are used. Prices of raw materials usually rise first and go highest, even when the general movement does not originate with these goods. The increase of orders and the rise of prices will bring about, during the phase of the business cycle characterized by prosperity, an expansion of production. In this phase manufacturers are induced to increase industrial equipment, to enlarge factories, or build new ones, either because the existing equipment does not make it possible to fill all the orders, or because the rise in prices has led to the expectation of a further rise. Great productive activity is displayed which affects principally fixed capital: industrial plants, blast furnaces, steam engines, manufacturing equip'Paris: Marcel Riviere et Cie. I9I3. Tome I, variations periodiqutes des prix et des revenuis and Les theories doominantes, Xii, 2,/ pp. Tome II, mouvements periodiques de la production and Essai d'une theorie, 418 pp.