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.

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.

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.

GENERAL business in the United States, already severely depressed at the close of I930, declined sharply during 193I; and, by the end of the year, the depression had become one of the longest and most destructive of which we have record. Early in the year some improvement actually appeared, and was reflected in numerous series measuring the volume of business. But this incipient revival was cut short as the world financial crisis became acute and introduced a new phase of contraction and liquidation. Even commodity prices showed some signs of stabilization during the year, especially in the third quarter; but the main course of prices continued downward, with the most severe declines affecting chiefly certain agricultural and mineral products entering largely into international trade. Severe as were the renewed curtailment in business activity and slump in commodity prices during I93I, with the attendant increased unemployment, reduced wage payments, impaired business earnings, and frequent commercial failures, the most sensational developments were in banking and currency. The overshadowing event of the year was the world monetary crisis, which reached its most acute stage in the drive on the gold standard of the United States in SeptemberOctober. For a few feverish weeks it was feared that the dollar as well as the pound would be driven from the gold basis. In spite of an unprecedented drain of gold abroad, suspension of gold payments in England, and stupendous shifts in the banking situation here, it presently became clear that the gold standard could be maintained in the United States. The panic then subsided, gold export halted and was followed by a substantial return flow, and the problems of reconstruction could be attacked with assurance that a greater disaster had been averted. The world crisis was accompanled, in its various phases, by the chief characteristic developments: huge international gold movements, from countries of impaired credit to the stronger centers; active flight from weakened currencies; widespread hoarding of currency, with preference for gold-standard currency rather than domestic currency; suspension of gold payments in numerous centers; acute banking difficulties, with severe liquidation of commodities and securities. In the United States, the banking system, already weakened by the prolonged depression and drastic liquidation, was subjected to an unprecedented strain. Hoarding, bank runs, and bank failures became more serious factors in the situation. The resulting pressure for liquidity in the closing months of the year contributed largely to the final wave of drastic liquidation which drove stock prices to new low levels and forced bond yields far above the current rates on money.

GENERAL business, after a nearly horizontal drift from June to July, resumed its downward course during the third quarter (Chart I, p. I65). Money rates, which had by June already canceled most of the violent advance incident to the I93I gold panic, declined in each month of the quarter. Speculation, following a very small drop during June, rose sharply in July and August and was only moderately reduced in September. VOLUME OF BUSINESS Adjusted data for bank debits in selected cities outside New York, our measure of the aggregate dollar volume of business, reached a new low level at the end of the quarter. The decline for July was negligible, but both August and September brought moderately large reductions. The check tax may have caused part of the third quarter drop in debits, but this effect is not measurable.