Knowledge that Transforms

N the endeavor previously announced to break ground for a thoroughgoing study of early American crises, which should proceed primarily upon the application of modern methods to the analysis of available statistical data, report has already been made upon various matters which concern the crisis period I837-42 the most extended period of severe misfortune not founded on political difficulties which this country suffered prior to the Civil War. Although some of the studies of particular phenomena have been prolonged beyond the years of recovery following this half-decade of troubled times, data of a statistical character at least covering the important period I830-45 have been collected, analysed, and presented upon the course of commodity prices, volume of public land sales, and market values of the common stocks of railroad and other enterprises.' To these should now be added such material as exists upon changes in the volume of business and upon banking and financial phases of the situation during the sixteen-year interval I830-45, an interval extensive enough to put the crisis period in proper setting while in conclusion the more important statistical series ought to be brought together to exhibit such relationships among them as seem most significant.

BEFORE we consider the varying advances achieved by various classes of industry since I9I9, it is useful and interesting to review the broad economic aspects of the period through which we have been passing. From our study of the cyclical fluctuations during the past sixty years, we have learned that economic data for that time can not be analyzed as a homogeneous whole. We find that there are certain periods which have been characterized by cyclical swings of great amplitude and much irregularity. There are other periods in which the ups and downs of business have been moderate, but, nevertheless, well defined. This distinction is clearly apparent in the fluctuations of the rates on prime commercial paper from i866 to I9271. During the reconstruction period from i866 to I873, the far reaching after-effects of the Civil War brought about extreme fluctuations in the rates on commercial paper. After a period of relatively narrow fluctuations, there emerged between I890 and I899 another interval characterized by wider variations, when the usual cyclical movements were greatly intensified by the Sherman Silver Purchase Act, by the menace of the free silver episode, and by the outbreak of the Spanish-American War. On the other hand, there were two long intervals in the sixty years under examination when money rates were virtually free from such extreme movements. From I875 to I890 and again from I900 to I9I3, there were periods during which the economic mechanism, having outgrown the influence of the tremendous disturbing forces which immediately preceded, and not being subjected for any considerable interval to the pressure of unusual new elements, settled down to a more stable and regular type of oscillation. The outbreak of the war in I9I4, however, ushered in another period featured by wide movements. Indeed, the war years were so dominated by military demands that critical economic analysis of this period is hindered by many obstacles. It will be noted, however, that during the war ancl post-war years, money rates have not exhibited the same degree of irregular month to month fluctuation which had characterized previous comparable periods. This reflects the influence of the federal reserve system. During I9I9-27, there are new and important elements in the economic situation, for which allowance must be made before one applies the methods of analysis suitable for such a period as I903-I3. The business situation in the United States has been profoundly influenced by the march of post-war developments in Europe, which brought financial upheaval and demoralization of markets. It has become increasingly evident that the United States is not an isolated self-sufficient nation, but, on the contrary, is affected materially by international developments. The fact that our country now has the greatest accumulation of gold in modern times serves to explain certain unusual phases in postwar business conditions. Furthermore, there have been substantial changes in the standard of living in this country, as well as in buying habits. These changes in the standard of living have been of such order as to have important effects on the usefulness of indexes of prices. Available wholesale price indexes are heavily weighted with data for staple basic commodities, and fail to measure the price movements of many of those things which people want to buy. People will deprive themselves in a variety of ways so that they may have automobiles, radios, fur coats, ultra-modern apartments, and other goods of the luxury class. This, then, means that price indexes fail to register adequately the price changes for articles people most desire to buy. It would be possible to cite many additional reasons to show why the period I9I9-27 has been an unusual one, but such enumeration is unnecessary to indicate that the injection of new elements into the compound we call the business situation has necessitated a revised point of

which is free from the influence of prices. Bank debits, which afford the most general index of business activity, measure the dollar volume of transactions made through checks, and hence reflect the prices of goods, services (i.e., wages in general), and securities, as well as the volume of transactions; whereas most series expressed in physical units, however well they may reflect general movements, actually apply to some particular phase of activity, such as freight shipments or manufacturing.

SINCE the first business survey was made in Tompkins County, New York, in I907 by Cornell University, well over eighty thousand business records have been taken in a total of something like 550 different areas in 45 different states in the United States. Mr. H. W. Hawthorne of the United States Bureau of Agricultural Economics assembled the principal facts for 7 I,55 I of these records in Table 652 (pp. I 285-I3II) in the I925 Yearbook of the United States Department of Agriculture. Since then, he has secured reports of about five thousand more records taken in fifty additional areas, and all the I927 reports are not yet in. It usually takes a year or more to work up the data of such surveys. In addition, there have been several thousands of other records taken in which data have been obtained with a somewhat different use in mind; for example, the progress records taken of settlers in cut-over or reclaimed areas, the progress records of groups of Southern farmers, the records of family living in which is obtained as a check against expenditures. Each of the business records contains an opening and closing inventory and a record of the receipts and expenditures of the year. From these are computed a farm income figure, and a labor income figure, the latter being the estimate resulting from an attempt to determine the return to the proprietor after a reasonable allowance for interest on investment has been deducted. No other industry has available such a large supply of data collected by educational and governmental agencies with avowedly scientific intent. It is not strange, therefore, that most of those interested in estimating the of agriculture have turned to these survey reports as an important source of data. Data from these surveys figured in the findings of the Commission of Agricultural Inquiry,' in the estimates of incomes by the National Bureau of Economic Research,2 and indirectly in the reports of the National Industrial Conference Board and the Business Men's Commission. Workers in the general field of economics are constantly drawing upon these data of income. It is therefore highly desirable that we have a clear idea of their meaning and applicability.

D URING I927 the petroleum industry added to storage approximately 64 million barrels of oil, representing an excess of supply over demand of 7 per cent. This marginal surplus caused a depreciation in gross income for the oil business in this country, as compared with I926, of upwards of $6oo,000,000, and has given the oil companies a year of lean to vanishing profits and, incidentally, something to think about. The primary cause of this striking decline in values was the competitive and uneconomic application in the Seminole field of Oklahoma of a brilliant and recently developed engineering tool the gas-air lift with the result that the rate of production was doubled or trebled, three or four years' normal output compressed into one year, and an indigestible surplus of gasolinerich crude oil thrown on the market. In retrospect, it is becoming apparent that this new engineering technique, designed to lower production costs and increase yields, was economically misapplied at a cost to the petroleum industry of over a half billion dollars. Someone has characterized this incident as the Seminole Follies. During the past 7 years, stocks of oil have expanded I98 per cent, from I96 million barrels at the close of I920 to 584 million barrels on December 31, I927. In fact, oil in storage has increased in volume every year since I9I8, with the exception of I926 when inventories were slightly reduced. Just as I927 was marked by the application of a new phase of production engineering, so the preceding years were characterized by two outstanding technological developments of far-reaching consequences: the perfection of the art of cracking, whereby gasoline can be manufactured cheaply from fuel oil; and the rapid development of the science of geology, facilitating the discovery of new oil pools and, more latterly through the growth of geophysical methods, permitting the location of hidden structures in advance of drilling. In reviewing the course of prices during this period, one is impressed by two characteristics of the petroleum price cycle: prices were laggard in declining whenever supply began to exceed demand, while quotations were quick to advance upon the slightest tendency of demand to outdistance supply, even though the latter change might be (as it often was) merely seasonal. Inherent in this price habit was a considerable element of speculation both in respect to crude oil inventories and oil shares. As a result of such price movements, the momentum of supply was subject to recurrent periods of stimulation, in the face of growing stocks and improving technology bearing upon supply. It has been said of this period that the industry gambled on an oil shortage and lost. It therefore appears that the petroleum industry has been passing through an era of unprecedented, and even revolutionary, advances in technology, without a corresponding progress in the art of economic control. The reasons for this lack of progress in economic prescience go back to a number of ideas that time has proven to be unsound: the illusion that the storing of crude oil is a profitable undertaking; the dogma that an oil lease under no circumstance should be permitted to suffer physical drainage; the idea that extremely high prices are just around the corner ready to compensate for all the competitive excesses of the moment in short, thinking based upon incorrect premises and giving rise, under competitive stress, to unsound business practices. The oil man has not yet learned to think in terms of dollars instead of barrels. A few examples of the lack of economic foresight may be adduced from current practices as symptomatic of the situation. Last summer an operator in West Texas acquired a vacancy permit on a strip of acreage 300 feet in width, crossing a major oil pool. A well was started, which in turn gave rise to nearly ioO wells, with the result that these wells, at the close of I927 were producing 5o,ooo barrels daily, largely going into steel storage constructed to receive it. No one familiar with costs and price trends can clearly foresee a price movement adequate to pay out the cost of producing and storing this oil. In July a discovery well was drilled in the

N the estimation of the General Price Level, or of all exchanges of goods, services and property, there are two modes of approach. The first is through the Equation of Exchange, or division of the total of payments by a measure of Trade. The second is an of the prices themselves, a weighted combination of all different types of series available. If we had astronomical knowledge of all business transactions in the country, in money, and at the same time a physical or volumetric index of everything exchanged, then we could calculate this General Price Level verv closely. Or if we had the final, or consumption of all goods and services of every sort, and the relative amount of each, we could achieve the same result. And this average price would be the reciprocal of the value of money or of the medium of exchange, that is, the true purchasing power of the dollar. So wide is the sampling of all these things now available, it is the writer's view that we have materials for the approximation of such a puice level, at least as reliable as any of our familiar indexes of commodity prices, cost of living, wages, rents, etc. But this is in part to suggest that these familiar indexes of daily use are scarcely the trustworthy and accurate instruments that they have come, in many minds, to be regarded; that in reality they are simply more or less useful approximations.

A,NALYSIS of business conditions in the I 2 federal reserve districts, as shown by the fluctuations in the volume of check payments (bank debits) since the beginning of I9I9, supports the following conclusions: (I) Business in the individual districts usually fluctuates in sympathy with that in the United States as a whole. There are no systematic differences in either the timing or nature of the business fluctuations among the various federal reserve (listricts, after due allowance has been made for varying seasonal movements and trends. Such differences as do appear are clearly less significant than the fundamental similarity in the broader movements. This condition is indicative of the close economic interrelationship of the several areas of our country. (2) Substantial improvement has been taking place in agricultural conditions in recent years. This is clearly reflected in the figures for the primarily agricultural districts, notably the Kansas City and Dallas districts. The sharpest recent movement is to be found in the Minneapolis district, where the marketing of a large spring wheat crop in I927 has been clearly reflected in the figures for debits. The Kansas City and Dallas districts exhibit a more steady gain, and have advanced materially above their I924 levels. (3) The recurrent brief periods of expansion, recession, and renewed expansion are less marked in bank debits than in basic production. This condition is explained by the fact that fluctuations in such production, while important, do not represent the movements of general business. Bank debits, on the other hand, constitute an extremely representative measure of the complex of activities included under the term general business. Production of consumption goods, wholesale and retail trade, construction of buildings and engineering projects, and agriculture these and all other forms of economic activity have a share in making up the total of check transactions. Thus, while production indexes have moved sharply during these intermediate movements, it seems probable that the narrower movements of total debits depict more accurately the course of general business over the past few years. Except in those districts which are primarily agricultural, the several districts contain such a diversity of economic interests that the volume of check transactions is relatively insensitive to changes in any one line of activity. There are, however, some instances (notably the Cleveland district, where the iron and steel trade is of such great importance) in which sharp changes in the pace of basic industry are reflected in the figures for debits. These conclusions are based upon adjusted relatives for bank debits which appear on Charts 3 and 5 and in Table 4. Conditions in the various federal reserve districts are discussed in the following sections and a map of the I2 districts appears on page I46. A full description of the actual data and the statistical methods employed in adjusting the figures for irregularities of the calendar, trend, and seasonal variation is given in the section on data and methods,

R ECENTLY we have made two important changes in the Index of General Business Conditions. These include: a revision, involving a change of one of the constituents, in Curve B; and a revision, involving a modification of the secular trend and standard unit for each constituent, in Curve A.1 Both of these changes have been occasioned by the extraordinarily vigorous, remarkably sustained and widely prevalent public participation in stock speculation. The change in Curve B, which is discussed first below, comprises merely a refinement, in the bank debits data, intended to eliminate from the curve some of the confusing effects of the speculative outburst. The change in the Curve A is much more radical; and, since it may cause difference of opinion, we shall seek to explain in considerable detail the justification and implications of our substitution of the new results for those heretofore used.