Knowledge that Transforms

T HAT violent fluctuations of production have marked the past two or three years is generally recognized. But just how great these fluctuations have been is not commonly known. Yet accurate information on this point is of distinct importance, for these have been years of radical change in the price level and extraordinary realignment in demand and supply. Accurate measurement of changes in the volume of production since I9I9 should contribute much to an understanding of the factors underlying current business conditions. Such measurement of output is afforded by the several indices which follow. The basic materials of modern commercial life have their origin in four divisions of economic activity: agriculture, animal husbandry, forestry, and mining.' The conditions of production in these four divisions are so dissimilar as to suggest a separate index for each. The separate indices may then be combined to form an index of the production of all basic materials. For a number of reasons, I9I9 is the best recent year with which to make comparison. This is true despite the fact that mineral production in I9g9 was low a fact to be taken into account in interpreting the most recent data of mine output. In most other lines I9I9 production was reasonably normal. Certainly no other year since the war serves as well as a base from which to measure subsequent fluctuations. Suppose, then, that I919 production in each major division of economic activity is taken as ioo. On this basis, production in I920 and I92I assumed the proportions shown in the following table:

FINANCIAL statistics, while generally more accessible, reliable, and up-to-date than other classes of economic statistics, present only part of picture of economic situation. They cannot be safely interpreted without a knowledge of other economic events and conditions. The attempt to interpret them by themselves is peculiarly dangerous when currency expansion and contraction, changes in commodity prices, and movements of foreign exchange are as violent as they have been in most countries since close of Great War. The present writer therefore vigorously dissents from so-called dictum of finance that position of a central bank of issue accurately reflects economic condition of a country, barring mismanagement of bank's business; I from view that the depreciation of exchanges of various countries roughly reflects economic deterioration of each; 2 and from conclusion that recent financial facts evidence a European decadence which threatens civilization. I On contrary, one who studies whole evidence from Europe since armistice can hardly escape conclusion that fundamental and important economic progress may take place in face of objectionable policies of government finance, rising public debts, severe depreciation of a currency, and a falling rate of exchange; and that central bank showings may improve and exchange rates may rise without necessarily signifying or even forecasting fundamental economic improvement. The present article, like writer's previous general surveys in this REVIEW, deals primarily with certain financial aspects of world's economic developments. It is written, however, in light of considerable evidence upon fundamentals of agriculture, transportation, industry, and trade which cannot here be set forth in detail. Unfortunately it is difficult for any one person to gather and assimilate adequate evidence of this kind from diverse sections of our still disorganized economic world; and too often one must present a judgment based upon partial evidence rather than a conclusion from a convincing array of facts. Suffice it to say that writer has attempted to obtain a fair perspective, and that readers must supplement and check that perspective by their own.4

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

THE outstanding features of our balance of international payments in I92I and the present year have been the pronounced reduction of the balance of merchandise exports,' an inflow of gold unprecedented in the history of any nation, and a marked increase in the flotation of foreign bonds in this market. Mainly as' the result of these changes, it appears certain that our balance of international payments since January I, I92Iincluding invisible as well as visible trade -has not shown any surplus in favor of this country. This is in striking contrast with the state of our international balance in IgIg and I920, and is an important part of the explanation of the rise of sterling exchange from a monthly average of 3.64 in July I92I to a monthly average of 4.44 in May I922. The excess of merchandise exports over imports in I92I was $i,976,000,000 compared with $2,950,000,000 in I920. The net import of gold was $667,000,000 compared with $50oooo,ooo 2 in I920. The excess of foreign bonds floated in this market over maturing issues was $4IO,000,ooo, whereas in I920 maturing issues exceeded new flotations by $65,ooo,ooo. The visible trade balance in I92Imerchandise, gold, and silver showed a surplus in favor of this country of $I298,000,000, compared with $3,029,00o,0003 in I920. The balance of goods, gold and silver, and foreign bonds issued and matured was in I92I only $888,ooo,ooo, as against a surplus in our favor in I920 of $3,094,000,000. It is not surprising, therefore, that when all items are taken into account our international balance for I92I shows no surplus whatever in our favor. In the current year it appears probable that we shall have a substantial debit in our international account. The balance of merchandise trade in the first quarter of I922 showed an excess of exports of only $I7I,000,000, and this was reduced by gold imports to only $86,ooo,ooo. When this balance is put over against the unprecedented flotations in our market of foreign government and corporate bonds, which amounted to $302,000,000 4 in the first three months of the year, we find a debit on these three items alone merchandise, gold, and foreign bonds issued here of $2i6,000,000. For the first half of this year, the debit will be even greater, since the monthly export balances have continued to be small, and the aggregate issues of foreign bonds to July i reached a total of $686,ooo,ooo,5 exceeding the entire amount issued in the full calendar year I92I or I920. This is a striking reversal of the conditions which obtained for the first two years after the armistice, when the excess of merchandise exports reached figures unequaled even during the war, and the flotations of foreign bonds in this market did not exceed the aggregate of maturing issues. Our balance of international payments for the calendar year I92I is given in the table below. The sources of the data and the bases for estimating the items for which definite data cannot be obtained are given in the Appendix. For the first time since the armistice the table shows an approximate balance of debits and credits. Aside from the merchandise trade and the huge inflow of gold, the most important items in the table are those relating to the international movement of capital and interest. The aggregate outgo on capital and interest account amounted to $I,097,000,000 6 and the aggregate