W pi THEN, in i919, the post-war Index Chart IV Vof General Business Conditions was constructed, the following statements were made: In order to interpret current data it was found necessary to estimate the level of prices.... The trend thus found is, frankly, a forecast which will be revised as new data become available. 1 . . . the readjustments from the extraordinary war period continue, it is necessary to repeat the cautionthat the conclusions to which the index points, rest upon a narrower basis than those for pre-war years, and are provisional and subject to revision. 2 The index constructed in July i919 was published in the Harvard Economic Service until May i9, I923. Since that date a revised index has been published currently, instead of the index constructed four years ago. The revised index chart, printed on page I79, is constructed according to the same principles as those used in the chart it displaces. Identical or similar statistical series are utilized; the same sequence of movements obtains; and the same methods of interpretation are applicable. The changes in the base lines, or lines of trend of the constituent series, and the use of units of measurement depending upon post-war fluctuations have resulted in a more convenient arrangement of the curves. The amplitude of the fluctuation for all three revised curves is approximately between -2 and +2 units of standard deviation. This. facilitates comparison of the direction and extent of movements of the curves a comparison which is of primary importance in making forecasts of business conditions.3 The data which have become available since the end of the war make it possible to determine base lines or lines of secular trend of the constituent statistical series with more confidence than was possible in i919. Especially in the cases of commodity prices and money rates, new data and a novel and effective device for eliminating secular trend (and yet preserving the cyclical fluctuations) give us confidence in our results. Further, the influence of income tax paymentsa non-business element which augments bank clearings and bank debits four times a year can now be appraised and allowed for.4 The statistical series utilized in our revised index chart include only bank debits, stock prices, commodity prices, and money rates. Curve A, speculation, is based upon New York bank debitsand industrial stock prices; 6 curve B, business, upon outside bank debits and commodity prices; and curve C, upon commercial paper rates. The constituent curves of each group are given in Chart i. Other loans (chiefly commercial) of reporting member banks of the federal reserve system are presented in that chart with money rates, but this series does not enter the average because it has become available only since i919, and there is not, as yet, sufficient evidence of the persistent similarity of its fluctuations with those of money rates to warrant its inclusion in curve C. Chart 2 shows the three volume-series plotted together and, in the lower section, the three priceand money-rate series. Asummary statement of the data and methods used appears in Table 2, page I93, and the adjusted items may be found in the Supplement for June I923, page i67. The revised index for i900-I4 constructed in the same manner as that for I919-23 is given in

THE Index of Trade, presented in the folded chart opposite this page, is designed to give a view of the combined fluctuations of trade, transportation, manufacturing activity, and industrial employment in the United States, month by month since I903. The Index is based upon representative statistics, but certain statistics are not available throughout the entire period and others, being expressed in terms of dollars, do not accurately reflect fluctuations in the physical volume of trade since the war. Consequently, it has been necessary to use somewhat different selections of statistics for the intervals I903-I5,9I5-I9, and I9I9-23, and all statistics expressed in terms of dollars have been excluded since I9I4. The actual overlapping curves for I9I5 and I9I9 are shown on the chart, the initial years of the intervals I9I5-I9 and I9I9-23 being plotted as dotted lines. All the statistical series utilized throughout were adjusted for long-time trend and seasonal influences before averages were taken, so that the resulting index depicts the percentage deviations from normal of the combined figures for trade, transportation, manufacturing activity, and industrial employment. The Index is an average of the corrected figures of diverse statistical series, such as bank clearings outside New York City, the value of imports of merchandise, gross earnings of leading railroads, production of pig iron in tons, and the relative number of wage earners employed in industrial establishments. The justification for combining such diverse series into a single average is twofold: economic and statistical. The economic reason for averaging the series is that together they reflect wholesale and retail transactions, domestic and foreign trade, the volume of transportation of all classes of goods, the activity of railroads, the volume of manufacture, and the purchasing power of wage earners. In other words these particular series are selected from the available data because they are themselves indices of economic conditions in trade, transportation, manufacture, mining, and agriculture, and then they are combined because, taken together, they touch business at many more points than does any one series alone. The statistical reasons for combining the series are: First, the major movements accompanying the ebb and flow of industrial activity of these series are very similar as to the timing of advance and recession2 and, therefore, the average fluctuates in a manner representative of that of each constituent series. Second, the minor irregular variations accompanying strikes, transportation congestion, and the like of the various series are very much moderated when a number of corresponding items are averaged. The average, therefore, may be expected to soften or iron out minor variations and to throw into relief the general ebb and flow of trade. For the period since the outbreak of the war in I9I4, as has been said, we have not included in the Index of Trade statistical series expressed in terms of dollars bank clearings, for instance -although we did include such series previous to I914. The reason for this difference of treatment of the two periods is to be found in the nature of price fluctuations before and after the war: previous to I914 fluctuations in the dollar amount of transactions reflected (approximately, not exactly) corresponding fluctuations in the physical amount of trade, but after I9I4 the violent rise and fall of commodity prices destroyed this correspondence. It is possible to utilize as the material for a continuous index of the physical volume of trade for the last eight years of violent price changes only such series as are expressed in physical units. For the intervals I9I5-I9 and I9I9-23, therefore, only such series are selected for the Index. In the choice of the current group of series still another criterion has been used: since promptness is essential, only those data are utilized which become available for each month by the middle of the following month.

T HE opening quarter of I92I was characterized by general depression and continued liquidation in most lines of trade; but it brought a turn of the tide in a few industries, like textiles and boots and shoes, 'which had been among the first to readjust themselves to changed conditions, and it saw a slackening of the precipitate drop of wholesale commodity prices. April witnessed some revival of speculative activity accompanied with an increased volume of trade in some other lines, which, however, proved later to be largely of a seasonal character. Upon the whole, the developments of that'month were distinctly encouraging; but May and June brought reversals of the upward trend in various industries, renewed liquidation in security markets, and a generally pessimistic sentiment which at times became decidedly, although somewhat vaguely, apprehensive. Upon the whole, the second quarter of I92I disappointed the expectations which were entertained quite generally early last April. The bad developments, which almost monopolized attention in May and June, were greater depression in the iron and steel industry; decreased activity in the automobile trade; unsettlement of the foreign exchanges; a sharp decline of exports; recessions of prices of oil, hides, leather, grain, live stock, and various non-ferrous metals, some of which had previously seemed to have reached a point of stabilization; increased unemployment in most sections of the United States; and renewed liquidation in securities which brought new low levels in the prices of both railroad and industrial stocks. The causes of these unsatisfactory conditions were partly of domestic origin and partly foreign. The chief of them seem to be: (a) the partial dislocation of international trade and finance, (b) the unequal readjustment of prices and production in different branches of industry, and (c) persistent money strain. Most of the contributing factors to the trade depression of the second quarter either admit of reduction to these terms, or, in one way'or another, derive their importance very largely from conditions produced by the three fundamental causes. The dislocation of international trade and finance results, firstly, from Europe's temporary inability to purchase her accustomed amount of the products of the rest of the world; and, secondly, from the fact that various European countries are heavily in debt to the United States, while, as the result of the reparations settlement, Germany is heavily indebted to various other'European countries. Even if the war had not left this troublesome legacy of enormous international debts which never could have come into existence under normal conditions, the temporary reduction of Europe's purchasing power would have disturbed seriously the international exchanges; but the cumulative effects of the two factors have produced a situation which will cause constant trouble for many years unless, as now seems unlikely, it is relieved by a major operation of financial surgery. The year I920 saw a marked increase of exports from Great Britain, France, and Italy, indicative of improved economic conditions and a gradual restoration of ability to pay for foreign imports. So far during I92I the reported value of exports has not increased, and in England, on account of labor difficulties, it has rather sharply declined. Lower export prices undoubtedly account in some measure for this result, but the rate of improvement since the end of the war has been discouragingly slow. Upon the whole, Europe is not yet able to trade with the rest of the world upon pre-war terms and is, therefore, still further from being in a position to meet her current obligations to the United States. The German reparation payments may tend in time to improve the international position of the countries that are to receive them, but their first effects have been to unsettle the foreign exchanges, the constant fluctuation of which already constituted a serious embarrassment to the trade of the world. In June the decline of European rates of exchange due to Germany's purchases of dollar exchange tended to cause unsettlement and reacted unfavorably upon our export trade. In the course of time, as things become adjusted to continuing reparation payments, the periodical settlements may be effected with less disturbance than was caused at the start. But it is clear that the mechanism of international exchange, which has not yet begun to function normally, will hereafter be subject to a new disturbing influence the effect of which will be farreaching. All this was to be expected, as the history of the French indemnity in I87I abundantly proved. But since the whole matter of reparations involved so much uncertainty, it had not been taken definitely into account; and it, therefore, produced a marked effect upon business sentiment during the last of May and the early part of June. Turning to the disturbing factors of domestic origin, it is clear that the continued depression of the second quarter was due in considerable part to the slow and uneven progress of liquidation in different lines of trade. Reduction of excessive stocks of goods in several lines went on slowly, the writing down of inventories continued, and floating indebtedness was in numerous cases converted into funded debt thereby reducing current obligations. These things tended, of course, to improve the general situation, but did not make for cheerfulness while they were going on since they meant the acceptance of the fact of heavy losses or occasioned a continued demand for capital. We still have a situation in which many commodity Drices are out of