Knowledge that Transforms

T HE present economic situation is controlled by three groups of forces: natural revival forces, official recovery stimulants, and the reform program. It is not my purpose to dwell upon classification niceties, but brief attention to such points will serve as a helpful beginning. We might instructively classify the items of the official economic program under three heads -relief, recovery, and reform. In such a classification the relief items, or those concerned primarily with relief, would bulk very large. A two-category classification, which merges relief with the others, brings out a most important clash of opinion as to public policy: the clash concerning the wisdom of jeopardizing recovery in order to achieve reform. Earlier, indeed, a clash of opinion appeared on another point: should we attempt a stimulated recovery, or let nature take its course? It is doubtful if, by the spring of I933, any considerable body of opinion favored entire reliance upon so-called natural forces for a cure of the depression. Even the outgoing Federal Administration had taken energetic actions, in limited areas, to facilitate or promote recovery. But a very substantial body of opinion not very popular among the mass, and particularly the suffering mass, of our people clearly favored a main reliance upon these natural forces. According to this opinion a more or less natural recovery had already begun in the summer of I932; the I933 bank crisis was a final, and perhaps avoidable, destructive episode in the readjustments incident to the depression; the reopening of the banks and the other confidence-restoring incidents at that time provided the essential impulse toward a vigorous upward movement; and government actions might well be confined largely to granting specific relief in certain areas where hardship was so acute as to impede general recovery. Under existing political auspices this issue as to whether natural forces should be relied upon is largely academic: the present Administration from the start insisted on action. Once that decision had been made and it had undoubtedly been reached long before March I933 it was certain that official policy would aim at stimulated, rather than natural, recovery. Even after this basic decision was made and became known, some critics still urged that all stimulants should be withdrawn as promptly as possible, and that natural forces should be allowed to resume their functioning. This view, in its extreme form, has little chance of being heard under existing political conditions; but in its moderate form it is likely to have and is already having important influence upon public policy.

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.

QNE of the most obvious results of the prolonged depression has been the considerable increase in the proportion of old automobiles in use, reflecting the great amount of replacement buying which has been deferred. Since I929 less than 82 million new automobiles have been sold in the United States. At present there are approximately 22 million passenger cars and trucks in use in this country. Over I3 million, therefore, are four or more years old. Between 8 and 9 million are not less than five years old; while there are something like 5 million whose age exceeds six years. There is little doubt that many of these vehicles are nearing the end of their useful life and would be discarded if their owners could afford to replace them. In addition, more than 3 million apparently have passed out of use since I929 and have not been replaced. The industry thus finds itself in a position unique in its history a truly enormous potential replacement demand has been created and is being further augmented. The very conditions, however, which have brought this great potential demand into existence have placed obstacles in the way of its becoming largely effective in the immediate future. Severe shrinkage of incomes, unemployment on an unprecedented scale, and the consequent added burden upon many of those who continued to be employed these things have occasioned much of the deferred replacement of automobiles and will continue to do so while they persist. Doubtless some replacement buying was postponed by persons who had the necessary purchasing power but who were reluctant to use it in the face of the great uncertainty as to their future economic position. Increased employment, however, and considerable enhancement of income on the part of a great many people, are conditions precedent to making effective in a very large way the existing potentials replacement demand. Furthermore, the long continuance of the depression has caused a progressive shrinkage of that important portion of the nor-mal automobile buying power of the public represented by the trade-in value of used cars. As automobiles become older their resale value naturally decreases. In the case of a large number of potential buyers this resale value has now fallen to quite insignificant proportions, and this shrinkage will have to be offset by the expenditure of more cash than otherwise would be required, if these cars are to be replaced by new ones. In another respect, also, the length and severity of the depression will tend to retard replacement buying. In depressions of short duration, even when they are severe, a considerable reserve of buying power may be expected to continue in existence and to aid in the early stages of the following business revival. But after four years of depression, with drastic and long continued unemployment, such reserves must be greatly depleted in the aggregate and completely exhausted in a multitude of individual cases. Last year, under the impact of increased confidence in the general business situation and lessened confidence in the dollar, some of the then remaining reserves apparently were used for automobile buying, probably accounting in part for this industry's revival in I933, but also lessening the likelihood of further similar stimulation in I934. In addition, increased taxes and license fees have made the ownership and operation of automobiles more

THIS companion article to that on gold, in th( July REviEw,' does not attempt to revie; the silver program in the light of either economi history or economic theory and particularly not in reference to the validity of that prograir as a matter of economic and other policy. Thos( aspects have already been ably presented elsewhere by such writers as Leong, Kemmerer, Graham, Leavens, G. A. Smith, and various others. Rather, the purpose is simply to present a condensed summary of factual, and especially statistical, data bearing upon the silver program. Special attention is devoted to the question ol how much progress toward the objectives of that program has been realized. The leading steps in legislative enactment, and in administrative action thereunder, are treated in a logical rather than the strict chronological order. Certain indirect or implied objectives are given little or no consideration; those reviewed are the ones to which main emphasis has been given in the announced statements of purpose, and are considered under four heads: (I) Metallic monetary reserves; (2) Price; (3) Production; (4) China.

A NY properly balanced account of the agricultural situation at this time must give important place to activities under the Agricultural Adjustment Act, but facts as to the present condition of agriculture, such as those presented by the writer in his article in this REVIEW in January I933, are needed to furnish a perspective for these activities. The former article undertook to describe the condition of agriculture not only as of that date, but also for the pre-depression years of I925-29, in terms of production, prices, income, land values, and mortgage debt.

QOME fifteen years ago, the writer had the pleasure of undertaking for the Harvard University Committee on Economic Research (predecessor organization of the Harvard Economic Society) a somewhat comprehensive and detailed study of the subject now under consideration; it appeared in this REVIEW for July I920.' The present purpose is simply to review subsequent developments, and to outline the major forces likely to affect future trends therein. For the present survey, it is not essential to dwell upon the detailed geological, mineralogical, and other considerations which have for so long influenced the history of gold production and of course still do so. A fairly detailed analysis of those considerations both in general, and for particular gold fields is already on record in the earlier study. Another reason why such physical factors can properly be given much less emphasis than before is that geological and mineralogical considerations are in a sense dominated, for the time being at least, by a single economic fact: the depreciation and devaluation of important currencies --among them, the United States dollar and the effect of that movement upon the profit margins of gold mining and refining. To deal comprehensively with these matters of currency depreciation and devaluation, the related matters of inflation of bank credit and price levels, and the curious Warren theory of the relationship between gold production and price levels, would lead us too far afield at this time; and they are therefore dealt with only in such incidental manner as is essential to the immediate question under review. Various analyses and critiques of these related economic matters have appeared elsewhere, particularly in the articles by Professor Bullock and Dr. Tucker, in previous issues of this REVIEW.2