Knowledge that Transforms

THE downward course of general business in the United States continued, with two moderate interruptions, during I932. Although the total decline for the year was large, it was somewhat smaller than that of I93I; and the average rate of decline was much slackened after the first quarter. Of the two interruptions to the decline, that of April was cut short by the second gold panic, and that of December occurred under conditions more generally favorable to sustained recovery (Chart i, p. 9). Whereas in I93I the dominant factor in renewing and prolonging the decline of business had been the world financial crisis, the critical influences during I932 were mainly domestic and centered about the second-quarter crisis in the federal budget. This crisis was accompanied by a second drive upon our gold standard, an episode following so closely upon the gold panic of September-October I93I that certain effects of the two episodes upon our credit and financial situations were all but continuous. The year was marked by steady and rapid decline in short term money rates; and the aggregate reduction for the year was greater than in the calendar year I930, though not as great as for the I2-months period ending in September I930. Even during the gold panic of the second quarter money rates fell, in response to the energetic easy money policy of the federal reserve system. With the passing of the second gold crisis, credit conditions improved; and the third and fourth quarters witnessed a vigorous upturn of member bank deposits, while loans were still declining. Many credit difficulties remain unsolved, but readjustment in bank credit has gone far and provides a basis for revival of business borrowing. Average wholesale commodity prices declined further during the year, but the total drop was only about half that suffered in I93I. Although the course of prices was downward as the year closed, there had been an important gain after the end of the gold panic. Hence the December figure was only moderately below that for June, and the last half of the year as a whole gave emphatic evidence of a slackening in the long slump of prices. In security prices the final half year was even more favorable: after the May-June panic had forced both bonds and stocks to extremely low levels, brisk recoveries occurred in the third quarter, and only moderate changes took place thereafter. Average prices of both bonds and stocks closed the year not greatly changed from the levels of January. In security markets, I932 brought striking evidence of a turn for the better.

T HIS is not an appropriate time for entering into refinements in describing the agricultural situation. The essential facts in it are of such striking character that the details can largely be ignored. What is needed instead is a reasonable interpretation of the outstanding facts. That such an interpretation is not easy to make is emphasized by two divergent interpretations. A Special Committee of the Association of Land-Grant Colleges and Universities, composed of three Deans or Directors and three farm economists, after reviewing the facts in the case concluded as follows: In I927, the agricultural situation was characterized by moderate improvement in prices and income from the postwar collapse of I920-2I, but an unfavorable position in comparison with other groups still persisted.... Evidencing the incomplete recovery, land values were still moving downward, and the net shifts in population were toward the cities, where better opportunities seemed to prevail.... Even though all other groups have experienced reduced income (since then), the farmers' share of the national income in 1930 and I93I has been lower than in any preceding year, and the farmers' rewards for labor, management, and capital, have been placed on a still lower plane in relation to the returns of other groups. The report then affirms that restoration of agricultural prosperity is vital to the welfare of the nation and urges that a comprehensive program of relief be undertaken, even including improving prices of farm products through special price raising measures.' On the other hand, Dr. Joseph S. Davis of the Food Research Institute, who has given much attention to agriculture in the past ten years, in a paper before the American Farm Economic Association in Cincinnati in December, questions whether general disparity between prices of farm products and other prices has been proved, or that special price raising measures to correct such alleged disparities are needed or desirable.2 Surely it will not be easy to evaluate a situation lending itself to such divergent interpretations; and I shall not expect to accomplish this to the satisfaction of the parties named. The elements in the situation to be considered are production, prices, income, population, land values, and mortgage debt.

THE drastic decline in industrial output that has taken place during the three years since I929 iS clearly revealed by annual indexes of manufacturing and mining output. Production of manufactures in I932 was the smallest in about twenty years, while the volume of mineral output fell back to the low level of I92I-22. The record of physical output is summarized, in fairly comparable form for the past thirty-four years, by the unadjusted indexes presented in Table I below.' The Federal Reserve Board index of manufactures dropped from II9 (I923-25 average = ioo) in I929 to 63 (preliminary) last year, and the minerals index fell from II5 in I929 to 73 (preliminary). While declines have been sharp in the two branches of industrial activity, it is obvious that the contraction of manufactures has been more severe than that of mineral output. Monthly indexes for manufactures and minerals, shown on Chart i, reveal certain movements that are not disclosed by annual indexes. In the early months of I930, and again early in I93I, the manufactures index showed some recovery from the low level reached at the close of the preceding year; but in each instance the improvement was short-lived. Decline was renewed in the second quarter of each year, and as the year ended, the index was far below the level of the opening months. In I932, on the other hand, no recovery occurred in the first half of the year, but the index continued to decline until 1 In order to make comparisons possible over a considerable number of years, this table presents the Federal Reserve Board indexes of production of manufactures and minerals with the average for the years I1923-25 taken as a base for the post-war years, together with the manufacture and mining indexes formerly published in this REviEw (ix: I49) for I899-I926, converted to the I923-25 base.

trade around the rising line of trend determined from the annual indexes. Crop production, Curve II, likewise advanced during the interval, but at a slower pace than industrial production and trade. Industrial and agricultural production combined, Curve III, follows the year-toyear fluctuations as well as the trend of industrial production and trade more closely than those of agricultural production. This is a result of the greater weight given to industry and trade than to agriculture because of the relatively greater importance of the former in our economic life. The percentage increases of the ordinates of the trend lines for I932, as compared with I899, for each of the three groups shown in Chart i are: (I) industrial production and trade, I 76 per cent; (II) crop production, 48 per cent; and (III) these combined, I32 per cent. The three years, I930-32, record a decline in physical production far exceeding that of any other period in the interval covered. Using the annual figures, the decline from I929 to I932 in the combined index is fully 4o per cent, as compared with a drop of less than I7 per cent from I920 to I92I, and ii per cent from I906 to I908. In other words, the most recent depression may be described as a major economic decline followed directly by another equally severe collapse. The, index of industrial production and trade, here presented, is constructed from series representing six major industrial groups: manufacture, wholesale and retail trade, railroad freight traffic, building construction, mining, and electric power production. Each of these series is presented in Chart 2 (next page), on a ratio scale in order to bring out rates of growth. Among the major groups, electric power production expanded most rapidly, while the volume of manufacture, wholesale and retail trade, railroad freight traffic, and mining grew more gradually. Building construction, on the other hand, exhibits no clearly defined trend, either upward or d wnward. We may rema k, however, that the index of building construction is based on estimates of the value of construction deflated by an index of building costs and the figures are less dependable, previous to I919, than those for any other series included in the present study. In fact, it is impossible to say, on the basis of available data for building construction, what the long time trend of construction actually was. The series is included, nevertheless, because reliable figures are available for I919 and after. Just as the industrial groups represented by the six constituents display divergent rates of growth of physical output, so their relative economic importance, measured in dollars, varies widely during the period covered by the index. 1 The index for total crops (agriculture) is that of Warren and Pearson, Prices, pp. 44-45. Although live stock is not included, feed crops as well as food and other crops are included, and the index measures agricultural production relative to the base period.

IT is an accepted fact that business cycles exercise a profound influence upon the finances of American cities. The purpose of this study is to compare the cyclical fluctuations of business and of municipal expenditures and thus to throw some additional light on the cycles in American business during the last century. Expenditure data extending over a long period, roughly one hundred years, exist for three cities. These cities are Boston, Massachusetts; Providence, Rhode Island; and Rochester, New York. For other cities, expenditure figures are fragmentary or in a form not suitable for analysis. The data for the three cities mentioned were carefully collected by writers of their financial histories, were supplemented for this century from the Census Bureau's Financial Statistics of Cities,and are probably as accurate as such figures can be made.' They include all items which go to make up the category government cost payments; namely, maintenance, interest, and outlays. It was impossible to eliminate capital outlays, and their presence doubtless clouds the picture somewhat. All expenditures were placed upon a per capita basis to take account of the influences of changes in population either through natural growth or the annexation of new territory. In the absence of complete knowledge as to the dates of fiscal years, it has been assumed that all figures are for calendar years. The faultiness of municipal accounting must also be recognized as rendering the data inherently inaccurate. Such errors are probably small compared to the size and changes in the annual items dealt with, and are not serious for the purposes of this discussion.

GENERAL business in the United States, as reflected by the B curve of the index chart (page 63), was at about the same average level in the first quarter of this year as in the preceding quarter a condition which had not prevailed since the second quarter of I930. The course of general business during the quarter was downward; and the March figure was undoubtedly at a new low level, somewhat below that of November I932. Exact measurement, either for March or the quarter as a whole, is impossible because of the temporary omission of bank debits figures due to the March bank moratorium. (See technical explanation below, page 73.) The declines in February and March were not exceptionally severe, particularly when allowance is made for the apparent sharpness of the revival late in March. The outstanding developments of the first quarter of I933 were in banking and credit. Various disquieting influences, largely political and psychological, led to renewed and intensified runs upon banks. Local moratoria became necessary, and presently a general suspension of gold payments and a temporary closing of all banks could not be avoided. March was largely devoted to the adoption of emergency measures which permitted the reopening of most banks; and certain other steps taken tended to restore confidence. The quarter closed with faith and hope rapidly reviving; and the imminence of inflation, which was to develop early in April, had not yet become a decisive factor in the reckoning of most business and financial leaders. Speculation, as reflected by Curve A (page 63), declined during the quarter; but the net movement for March as a whole was nearly horizontal. The most striking manifestations of the banking and monetary crisis were thus not in speculation but in the field of money and credit money rates and the currency and banking data.