Knowledge that Transforms

THE object of this article is to present the results of a study of certain statistics bearing upon wage conditions for railroad labor in the spring of I934. It is hoped that some light may be thrown on the situation which nearly resulted in a national strike of all railroad unions. It is also hoped to make rough comparisons of hours and wage rates paid the employees in this service and those in industries which have signed codes under the National Recovery Administration. For the most part the article will be confined to the presentation of the analysis and interpretation of statistical data, and will not attempt to build up a case for either side in the recent wage dispute.'

T HE major purpose of this article is to trace the recovery in profits, and figures at least as frequent as quarterly are needed. It is desirable also to exclude certain types of corporate enterprise: railroads and other utilities, banks and other financial concerns. Unfortunately there are no quarterly figures which give an adequate coverage, or even an approximation thereto, of all industrial corporation profits in the aggregate. We base our discussion of the quarterly record on aggregate data for a small list of leading industrial corporations (Chart i), which publish quarterly reports in a form available for this purpose.' The list is not a highly satisfactory sample of all industrial corporations, and it seems likely that the resulting figures give an over-favorable indication of the degree of revival in profits.

TN this article, I am concerned with the banking and monetary policies of the Treasury, the reserve banks, and the commercial banks of the country in the year that has passed since the Bank Holiday was proclaimed. By way of introduction, a brief discussion of the developments in the preceding year or so follows.2 On February i, I933, the investments of reserve banks in government securities were approximately one billion dollars more than that on February 3, I932. The reserve banks, despite the help which the Reconstruction Finance Corporation provided by advancing 850 million dollars to 5,6oo banks in I932, were not successful in stopping the liquidation, although some improvement was noticeable in the second half of I932. Transfers of cash from the strong to the weak were bound to have a disturbing influence later; but in I932, as the reserve banks and the Reconstruction Finance Corporation created additional cash and redistributed available supplies, the stronger banks, both in the East and the West, tended to gain cash, many of them depositing their excess cash with correspondents. For the year ending January 25, I933, bank balances with correspondents in leading cities increased by I,2I3 millions, of which 772 millions were deposited at reporting banks in New York City. Transit clearings through the gold settlement fund in Washington, which give some indication of the balance of payments between the I2 reserve districts, reveal that in the year ending January I933, the New York, Boston, and Philadelphia reserve districts gained I,I99 millions on clearing account while six western districts lost 1,045 millions. Official interference is evident in the loss by the eastern group of I,OI2 and the gain by the western of 993 millions through government transfers. The statements of reserve banks did not always reflect the effects of these clearings. Thus despite the very favorable balance of transit account for eastern districts in the first half of I932, the condition of eastern reserve banks, as revealed by a study of the distribution of the system's cash, rediscounts, and securities, was not strong. The explanation is probably the large transfers of cash on government account and losses of gold which are first felt by the New York reserve bank. In the second half of the year, the position of the eastern reserve banks improved as large deposits of cash were made by correspondent banks. New outbreaks of banking failures early in I933 led to withdrawals of bankers' balances from New York. Very large withdrawals of notes (I,485 million dollars in five weeks ending March 8) and losses of gold (305 millions) were financed for the most part by borrowing at reserve banks (II,45 millions), and by the purchase of bills (386 millions) and securities (I20 millions) by reserve banks. Withdrawals of bankers' balances from New York and the large losses of gold explain the large proportion of the additional borrowing at the New York reserve bank; and also sales of i8i millions of securities by the New York bank and borrowings of 2I0 millions from other reserve banks. Reserve authorities did heroic work, and in little more than two weeks after the Bank Holiday, two-thirds of the additional funds borrowed from reserve banks the previous five weeks had been repaid and fivesixths of the losses of reserves suffered by reserve banks had been recouped.

W HEN the Securities Act of 1933 went into effect a little over a year ago, borrowing by private corporations through sales of stocks and bonds had very nearly ceased. The banking suspension had occurred some four months earlier, and the deflation of the preceding three years had been felt with particular severity in the market for newly issued securities. The legalization of beer brought a number of brewery offerings into the market after the bank closings, and some others were made just before the law went into effect, but the total volume of such issues amounted to little. The past fiscal year, all but a few days of it under the Securities Act as originally passed, has shown a volume of issues only a trifle higher than in the preceding twelve months, the advance being more than accounted for by the increase in state, local, and farm loan issues, which are exempted from the provisions of the act.' The total volume of issues actually floated, according to the compilations of the Commercial and Financial Chronicle, amounted to just over I 2billion dollars in I933-34, compared to a figure of just over IS3 billions in the preceding fiscal year--the lowest of the depression. About one billion dollars represented new capital and half a billion was for refunding. Issues by public bodies amounted to I,I92 millions, against 607 millions in the preceding year, and those by private corporations to 364 millions, against 6I3 millions in I932-33. The figures of the Federal Trade Commission apply to securities registered, which may not be marketed in their entirety and are offered only after an interval of twenty days. In content, they differ from the Chronicle's compilation largely in that (i) they exclude the public group, which bulks so large in former figures, and railroads, (2) they include investment trusts sold as participating shares (excluded from the Chronicle's figures), and (3) they include deposit certificates under reorganizations. The total was 963 millions for the fiscal year; the bulk was issues of financial companies, which amounted to 609 million dollars. The latter figure is of especial interest because it gives an idea of the amount of financial flotations not included among those publicly issued. The latter amounted to little more than I0o2 million dollars according to the Chronicle's figures. The remaining items were industrial issues225 million dollars and those growing out of reorganizations -I 282 millions.2

ECONOMIC crises and depressions are primarily social products. In the complex process by which they are brought about, Nature often plays a significant part. The major responsibility, however, rests on men, through multifarious private actions and numerous public policies. Of course, no individual, group, or government strives to bring on a crisis or depression. Rather with motives of private gain and public good appraisals, forecasts, and commitments are made, and actions taken, which give rise to a condition of more or less serious disequilibrium. Major crises and severe depressions commonly result from the unfortunate conjuncture of a considerable number of disproportionately developed or internally weak situations, often not previously recognized as such. The severity of the crisis, and the depth and duration of the depression, largely depend upon the number of parts of the economic structure in which serious weakness exists, and the difficulty with which such weaknesses can be corrected and adjustments made to the whole. Among the distinguishable parts of the economic machine in which fallacious ideas, erroneous appraisals, mistaken forecasts, and ill-judged actions may create an unbalanced condition, the positions of great staples of production, trade, and consumption are important. The intricate task of analyzing the factors responsible for the occurrence and intensity of crisis, recession, and depression, and the factors that hamper or promote recovery, requires the services of students of commodity economies. Such services in particular cases are needed in the formulation of adequate general theories of economic conjuncture.1 With this objective I present here, with interpretations, some salient facts regarding one great staple, with special reference to the crisis and depression of I929-34.2 Wheat is a basic food product, the preferred if not invariably the principal cereal in the diet of most of the population of what may be called the commercial world. It is grown by millions of farmers, over a large part of the agricultural world. It is a major source of income for large agricultural groups. Its price has a powerful influence on prices of other grains and of farm land, thereby affecting much larger agricultural groups. The income of these groups is a dominant factor in the volume of business and income of various non-farming groups. In volume and in value, wheat is one of the most important commodities entering into domestic and international trade. Its movement therefore vitally affects commercial transportation interests, and its price is of vital concern to speculative and financial interests. It is, moreover, prominent among the commodities with which national policies have dealt. In this latest major recession and depression, which has been notably severe in agriculture,3

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.

T HIS discussion aims to indicate the implications, concerning the major consequences of the N.R.A., of selected broad statistical measurements of various factors in the business situation. Even under ordinary circumstances one cannot with assurance outline the causal connections between particular economic events or policies and the concurrent or subsequent course of business as revealed in statistics. In attempting to interpret these statistics, therefore, we must bear constantly in mind that some of the observed movements may be due to causes, natural or official, quite unrelated to the N.R.A. The main outlines are, however, so distinct that it seems safe to present tentative conclusions concerning certain chief consequences of the N.R.A. The discussion will be confined to fairly general aspects of the situation. Even if it were desirable to study the detailed effects of the N.R.A. upon numerous small or local industrial operations, significant statistics would not be available. As a matter of fact, it is clear that there is now in high places a realization, somewhat belated but very welcome, that the N.R.A. procedure, whatever the chance of its success for large industries operating on a national scale, encounters insuperable obstacles when applied to local enterprises.

BUSINESS definitely receded during the third quarter of I934, following signs of irregularity which had begun to appear in the preceding three months. Toward the end of the quarter, the recession became less rapid, the business curve of our index chart showing little further decline in September, after a considerable drop in August. The speculation curve at the end of the quarter was considerably lower than at the beginning, though it showed a small recovery in August, and did not revert to the July low in September. Bond prices were weak during most of the quarter, despite the continuance of an abnormally low level of short time money rates. That government measures to stimulate business had failed to bring about a sustained and substantial recovery was clearly demonstrated by the recession of the third quarter. This failure presents two rather different, though not entirely separable, aspects: the first of these relates to the effectiveness of Administration measures, once production and activity had risen to a higher level, to sustain activity at the higher prices made inevitable by higher costs. If there was an increased flow of funds into the hands of consumers because of shorter hours and higher wage rates for labor a development not susceptible of statistical proof it did not result in buying sufficient to maintain the production rates of last spring. The effects of the introduction of codes had, after a year of their operation, pretty well worked themselves out; but at the higher price levels that had been reached readjustment to meet demand was necessary, and this adversely affected both business activity and the prices of industrial products. A second aspect involves the failure to maintain the confidence of business in the whole gamut of governmental measures undertaken by the Administration. Criticism of the Administration's industrial program became insistent during the quarter; there was increasing distrust of past and anticipated monetary measures in part because of the action taken regarding silver; and realization of the adverse budgetary aspects of government spending on public works and of federal provision for relief was heightened by the clearly evident deterioration in the business outlook. The quarter until near its end was thus one of growing apprehension and loss of confidence, despite the fact that the recovery program was in part reorganized. It cannot be doubted that this apprehension exerted an important retarding effect on business activity. Probably its most important effect was the weakness which appeared in the bond market, at a time when further advance was indicated by most factors except the condition of the government finances and the confused monetary situation. In the closing month of the quarter, certain factors which had retarded business in the summer showed improvement. The drought, after inflicting great hardships in the agricultural districts, was broken in September. The nationwide textile strike, which had closed down many mills, was brought to an end, with a consequent increase in operations and employment in that industry. Meanwhile retail trade in part, at least, as the result of government spending had shown unmistakable improvement, despite the curtailment in manufacturing operations. The economic situation abroad continued unsatisfactory. Slowing down of business in countries still on the gold standard was ev'ident, and there occurred a sharp drop in sterling exchange which proved a disturbing element in international markets. Part of this decline was seasonal; but it became large as gold began to leave the United States, since these exports were regarded as signifying the willingness of the United States to maintain the dollar on its present basis at least for the time being.' Following such action by this country the decline in sterling probably marks a further step in competitive debasement of currencies, whether such a development is intentional or unintentional.

BUSINESS during the second quarter of I934 was more active than during the first. Dollar volumes continued to expand at a rate very like that of the first quarter, and Curve B of our Index of General Economic Conditions (page I53) rose in June above the previous high point reached in July a year ago. June, however, brought a greater-than-seasonal decline in manufacturing activity and employment, while during the quarter speculative activity decreased, with a moderate dedine in stock prices. The extreme ease in money conditions was unbroken. Despite fairly good business performance, business sentiment continued unsettled. Returns were being compared with those when business was showing rapid advance a year earlier, and the period of seasonal slackening after the spring peak was regarded with apprehension. Long discussion of the control of the stock exchanges, which involved many matters affecting business transactions generally, was disturbing. The unfavorable aspects of certain of the government measures concerning business were being increasingly brought to light, and some of the economic developments of the quarter increased the uncertainties under which business was operating. Of the unfavorable factors, severe drought in the farming regions was one of the most important. It was clearly recognized that preexisting surpluses of certain farm products did not counterbalance a loss in crops which meant the destruction of income for a great many individual farmers. The railroads and certain other industries dependent upon the volume of agricultural production to be marketed will obviously be adversely influenced, and an additional burden was .put upon the federal finances by the necessity of relief. A second disturbing element was the multiplication of strikes and threats to strike. This is a usual concomitant of business recovery, but was clearly aggravated by the extent to which relations between employer and employee had been affected by the recovery measures. A third element, to become of greater moment after the end of the quarter, was the evident deterioration in the situation abroad, particularly in its political aspects. Developments in important European countries are reviewed in a later section of this article. The only important further extension of federal control over economic processes came in the Securities Exchange Act, certain provisions of which went into force on July i. This act was the product of prolonged consideration; and whatever its merits or demerits may ultimately prove to be, there can be no doubt that the discussion exerted a depressing effect upon the market. Further attempts to expand credit were made in the housing act and the legislation adopted relating to loans by the Reconstruction Finance Corporation and the reserve banks. The so-called Frazier-Lemke act, on the other hand, providing for a moratorium of farm debts under certain conditions, seems sure to increase the difficulties of extension of private credit to agriculture. The Silver Purchase Act operates to expand the amount of silver certificates in circulation and thus to displace reserve notes with this form of currency. On the whole, developments during the quarter were in the direction of modifying certain governmental measures which were admittedly producing untoward results in business. The amendments to the Securities Act of I933 were the most important of such measures, and give promise of putting to an end the prolonged stagnation of security flotations which has had such serious effects upon activity and employment in the heavy industries. In the administration of the National Industrial Recovery Act, the suspension of the service codes, and the decision to abandon price-fixing in new codes and reconsider such provisions in those already operating, clearly look in the direction of less rigid control. Corporate statements for the second quarter reveal the increased costs attributable in large measure to the introduction of the codes, and suggest that such increased costs probably affect the bulk of goods now being produced. There appeared during the quarter, moreover, an increased tendency toward similarity in fluctuations of manufacture, employment, and pay rolls, indicating that changes in hours and wages attributable to the codes had probably produced their maximum result.