study extends through the subsequent depression and recovery, the bull market of the late twenties, and the stock market crash of I929. It thus includes the two periods of high interest rates and monetary strain -I920 and I929experienced during this time. The study is based upon indexes of the yields of short and long term governments published in the Annual Reports of the Federal Reserve Board, and upon a private compilation of the rates attached to new issues of short and long term government securities sold in the open market. For purposes of comparison and to show the position of these indexes in the money

LAST November, following the lifting of the restrictions upon foreign exchange, the President advised caution in the enactment of further reform legislation and gave a distinct intimation that, for the present, industrial recovery should be given the right of way. The effect upon industry and government credit was not only immediate but so striking that it might well have encouraged other moves calculated to increase confidence and thus improve the economic outlook. Instead of this we have had drastic action to force reduction of public utility rates, farreaching proposals for security legislation, and a budget which, to say the least, is not reassuring. Moreover, the new Congress, probably more radical than the last, has convened; and it is probable that the innovations of the next few months will by no means be confined to the program outlined by the President. These developments cannot be without effect upon economic conditions in I935, and are likely to retard, even though they may not prevent, the progress of industrial recovery. For such improvement, sustained even though gradual, the prospect would be excellent if it could be given the right of way, that is, if future governmental policies could be favorable to confident enterprise. Even though no small part of the business activity of I934 was caused by government spending, some part of it was due to a natural rebound from the low levels prevailing during the depth of the depression. The passage of the so-called devaluation act, which was widely accepted as evidence that depreciation of the dollar was at an end, and the lifting of the restrictions on foreign exchange, which is hard to understand except as a move toward permanent stabilization of the present dollar, both met with a quick response from industry; and there can be no reasonable doubt that like effects would follow like causes in I935. But it is now evident that economic recovery is not to have the right of way, and must take its chances in a maelstrom of political developments some of which may do no harm while others will certainly hinder. This is unfortunate because since the excited speculative upturn in the second quarter of I933 the United States has not enjoyed a sustained economic recovery. Our B curve sufficiently attests this fact, and is confirmed by the great majority of the other indices of the volume of trade or industrial activity. The last half of I933 saw a sharp recession from the levels prevailing in the early summer of that year, the first half of I934 saw much of the lost ground recovered, and then the last half of that year brought another recession which continued until November. It is encouraging that the recession of I934 was less pronounced than that of the previous year; but, nevertheless, from July I933 to January I935 the general movement has been horizontal and not upward. And this in spite of all the efforts put forth by the government to stimulate and even force recovery, and in spite of the undoubted gains, for example in retail trade, made by those industries most directly benefited by government expenditures. Our showing is in striking contrast with that of most of the other countries for which we have indexes of industrial production'; and it is a significant fact that the comparison results so unfavorably for the country which went further than almost any other in its efforts to end the depression. It is not strange, therefore, that the year I934 seems to have disillusioned the Administration with respect to many of the experiments upon which it entered so confidently in I933, or that, at the opening of I935, it proposes to concentrate its relief and recovery activities in a new plan which it hopes will work better than previous plans have done. That I935 is not a good year for further political experimentation is further evidenced by the budget recently submitted to Congress. For the fiscal year ending June 30, I934, the net deficit financed by borrowing was 3.6 billion dollars. For the current year it is estimated at 4.3 billions; while, for the year beginning July i, I935 and ending June 30, I936, it is estimated, more or less conjecturally, at 3.9 billions. These sums may not be beyond the country's ability to finance, if all or most other things go well; but they will certainly strain its credit to the danger point unless a natural and sustained recovery of 1 This REVIEW, XVI (I934): 256.

SOME months ago it became apparent that important basic industries were lagging behind in the process of economic recovery which seemed to be under way in the United States. Throughout the entire depression trade has been slackest and unemployment greatest in industries producing durable goods. This has occurred in spite of the efforts of our governments, federal and local, to carry through ambitious programs of public works; and it becomes very striking when the low level of production in these industries and others largely dependent upon them is compared with the levels recently obtaining in industries that produce goods of a relatively perishable character. The employment indexes of the Bureau of Labor Statistics show that a group of large industries producing such commodities as beverages, butter, meat and meat products, wirework, explosives, chemicals, soap, and rubber goods (other than tires and shoes) were in November employing numbers of laborers that ranged from 2.7 to 36.6 per cent in excess of the number employed in the basic year (I926) used in constructing the index. In exceptional cases, where for special reasons there exists a very strong upward trend, much higher increases are recorded, ranging from 69.3 to I89.I per cent. But, when one turns to industries producing durable goods such ,as cast-iron pipe, steam fittings and heating apparatus, structural metal, agricultural implements, railroad cars, locomotives, lumber, brick, tile, cement, and stone, the number of people employed last November ranged from 20.2 to 50.0 per cent of the number employed in the base year I926. Equally startling is the record of industrial production shown by the Federal Reserve Board's index which, unlike the employment data just used, is adjusted for seasonal variation. Production of consumption goods such as textiles, shoes and leather, rubber tires, food products, paper and printing, tobacco, and petroleum products ranged last October or November1 from 89 to I52 per cent of the production in the base years (I923-25). At the same time production of iron ore, lumber, automobiles, cement, iron and steel, lead, and zinc, ranged from 23 to 72 per cent of average production in the years chosen as a base. It is too clear for all doubt or cavil that, in considering what should be done with the Securities Act, we must take into account the fact that industries producing either durable consumers' goods the marketing of which requires the use of consumers' credit, or capital goods the sale of which depends upon the ability of industries to finance their capital requirements, will be seriously affected by any measure that restricts the flow of capital into industrial enterprise. The unfavorable showing of this important group of industries is one of the discouraging factors in an economic situation which upon the whole shows decided improvement. No single cause accounts for it. Provisions in some of the codes, by which restrictions are placed upon the introduction of new machinery or effort is made to restrict excessive production, cannot but react unfavorably upon certain basic industries. Debasement of our currency, beside impairing general confidence, makes it difficult to look very far ahead, and so injures the construction industry and others dependent upon it. Finally the Securities Act of I933 interferes seriously with the flow of capital into industries that require financing upon any substantial scale. The Act is not the only reason for the extremely small volume of financing in I933, but it reacts unfavorably upon the very industries that now lag behind the general economic recovery. The need of federal regulation of security issues is patent, and the general procedure prescribed by the Act seems appropriate and effective. The difficulty is that some of its provisions impose liabilities that issuing houses and security dealers would be foolish to assume. In investing one's own funds it is impossible to avoid mistakes, and the same is true with the business of buying securities for sale to others. The facts presented in any prospectus or oral communication are frequently of a sort that does not admit of exact determination but must depend upon someone's judgment which, with the best of intentions, may turn out to be bad. To sustain the burden of proof that he did not know, and in the exercise of reasonable care could 1 In some cases November figures are not yet available.

SINCE the spring of I933 we have had occasion to call attention to the successive stages through which the Administration's program of inflation has progressed. It began, of course, with theextraordinary legislation concerning money, reserve credit, free coinage of silver, and the issue of Treasury notes, which gave definite notice of the policy and started anticipatory inflation of stocks and many commodity prices. But no Treasury notes were printed, no new currency was forced into circulation, and all that happened for some months was an inflation of reserve credit through purchases of government securities, made in the hope of stimulating the expansion of bank credit. But the business world was in no mood to borrow; and the many new, and frequently inconsistent, policies adopted by the Administration confused the business prospect and tended to impair confidence, so that anticipatory inflation was presently followed by a decided reaction in the summer of I933. In the fall, when this reaction had gone to a considerable length, the government began its extraordinary gold purchases at rising prices, which finally resulted in a price of $35 per ounce and the devaluation act of last January. But these measures, like the earlier ones, forced no new money into circulation; and, since they tended to impair confidence, made intelligent business men less inclined than ever to increase their borrowings at the banks: so that the inflation stimulant had not yet begun to work as the inflationists expected. Meanwhile other measures, not of a monetary character and in the mind of the ordinary observer not connected with the inflation policy, had resulted in an enormous increase in federal expenditures for public works, private relief, and other projects believed to be of unquestioned efficacy in stimulating recovery. Generically, these were described as priming the a term which continues to be used in spite of the fact that rivers of public money have been pumped through the Treasury into every state of the Union without starting a natural flow of water through the pump. In this process, little attention was given to the destructive effects of public money upon the valves of the pump, the condition of which depends upon public confidence and the spirit of enterprise. These would be immensely strengthened by the appearance of signs of natural recovery from terrible depression, but very certainly injured when such things as improvement in retail trade or increase in industrial activity are either suspected, or definitely known, to be due, at least in considerable part, to the outpouring of funds from the Federal Treasury. Under these circumstances favorable developments may be of an artificial character, and may be due to an unhealthy process which all intelligent persons know cannot go on forever. Whether any real recovery has occurred, and if so how-much, cannot be determined with any certainty until the outflow of public funds gradually approaches its end and it can be seen that industry is able to take up its normal load and carry on strongly and profitably. Since the government's expenses have been so large, and its revenues have not increased as much as anticipated by reason of the general recovery the Administration expected to bring about, economic conditions this fall, however much they may be above those of a year ago or those existing in the spring of I933, have proved a disappointment; and the entire recovery program is now being questioned as never before, and in part reorganized, although, of course, in such a way as to put the best face upon things and avoid admission of failure. It was under such conditions as these that the Treasury undertook its recent refunding operations. By way of preparation, various subordinates made addresses or issued statements intended to reassure the business world and reestablish confidence. But these inevitably had only a momentary effect, and could reassure only the unthinking or those able to think but unable or disinclined to use their memories. Meanwhile the condition of the bond market had become unsatisfactory, and dollar exchange had weakened; so that government funds were being employed in the purchase of government securities. On one day when the market was particularly weak, an obvious effort was made to 'rig)' the bond market by last-minute purchases con-

IN previous depressions recovery was natural process tolerably well understood. Nearly fifty years ago leading treatise widely used in colleges' pointed out financial or industrial shocks which checked production did not destroy our economic organization because some industries, especially those yielding the necessaries of life, will never be suspended. Depression might last considerable time, but was liable to be terminated, after longer or shorter period of suspense, by reviving courage and enterprise on the part of men of affairs, or through the stimulus to production administered from some quarter. The one essential condition was that speculation be initiated, men begin to look ahead, to anticipate demand, and to discount the future. Nowhere ought recovery to be more rapid than in the United States, because among no people is more of elasticity, greater alertness of action, more readiness to assume responsibilities and to run risks. Yet recovery begins cautiously and fearfully, and readily checked by misfortunes or continual apprehension of hostile or meddlesome legislation. In I857 nothing occurred to retard the process, and within a few months production was again at the limits of our capital power and labor power. But at other times the country had not always been so fortunate. When the whole body of business men are sore from disasters; when much of the industrial and commercial structure still lies in ruins, it takes but little to check the disposition again to adventure capital. That little abundantly supplied by the popular apprehension of legislation unfavorably affecting money and credit. One thing governments could always do if they chose, set their own houses in order; and this of course helped to restore confidence. They naturally found it necessary to increase outlays for poor relief, and sometimes instituted public works in order to provide employment;2 but such measures were probably regarded as mere palliatives. Industrial recovery was left to the forces naturally operating in private industry, and it never failed to occur. In the depression of I92I our national government, through the War Finance Corporation, intervened helpfully to repair some of the damage resulting from overexpansion which the war had occasioned in certain industries; but the recovery which began in I922 was almost wholly natural process for which governments, national and local, assumed little or no responsibility. Very different, of course, has been the history of the present depression. The panic of I929 brought the federal government into the field with measures designed to stimulate construction industries, support prices of agricultural products, and restore confidence. But the depression was world-wide, and had brought commercial and financial dislocations unlike any previously known except, perhaps, those which followed the long war which ended in i 8 I 5. After the drive against the dollar had been successfully met, natural recovery might have begun in the United States sometime in I932, just as it did begin in various other countries. But this was prevented by the refusal of Congress to set the government's house in order and by the development of strong sentiment in favor of inflation. Further banking difliculties inevitably developed, and these culminated in the general suspension which occurred in March I933. At this juncture the present Administration, supported by friendly Congress, took upon it. self responsibility for industrial recovery, and to this added an extensive program of reforms. Whether recovery or reform was intended to be the primary objective has never been clear. At some times the former and at other times the latter has seemed to have precedence, and the result has been unfortunate. In recent months emphasis has seemed to be shifting from reform to recovery; and for this reason especial significance probably attaches to the recent action of the Treasury in removing restrictions upon foreign exchange, and to the statement of the President there can be no security for the individual in the midst of general insecurity, and our first task to get the economic system to function so will be greater 'F. A. Walker, Political Economy (New York, i888), pp. I83-86. 2 A few municipalities, such as Rochester, New York, undertook such public works in the depression following the panic of 1837.